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The report, "UK and EU: Brexit Presents Modest and Manageable Credit Challenges for Exposed Issuers", assesses the potential economic and credit impact of a British vote to leave the EU, known as "Brexit", on non-financial corporates, infrastructure companies, banks, insurers, sub-sovereigns, structured finance securities and EU-based issuers.
"A UK vote to leave the EU would create heightened uncertainty, which would lead to modestly weaker economic growth in the UK over the medium-term," said the report's co-author Colin Ellis, Moody's Chief Credit Officer, EMEA. "Brexit would have credit implications across different sectors."
As previously stated, following a vote to leave Moody's might assign a negative outlook to the UK's Aa1 sovereign rating to reflect the heightened uncertainty and the weaker growth picture. It is highly unlikely that the UK's existing arrangements with the EU would be replicated in full following a vote to leave.
However, Moody's central view is that both the UK and the EU would want to avoid an unnecessary large-scale disruption to trade and capital flows, given their deep economic and financial ties.
For non-financial corporate issuers in the UK, Brexit would be credit negative, reflecting the weakened macroeconomic outlook. While Moody's believes the UK and the EU would preserve most of their existing trading relationships, any substantial new barriers to trade would pose a more significant threat to corporate creditworthiness. Infrastructure companies could face uncertainty around new regulatory regimes.
The impact on the insurance industry would be manageable, unless there is significant disruption to "passporting", which allows companies to provide cross-border services.
There would be limited credit implications for banks based in the UK or for foreign banks with sizable subsidiaries. The impact on banks' credit fundamentals would be most pronounced for banks with cross-border business models, although these banks are reducing their international exposure.
For sub-sovereigns, the negative economic consequences from Brexit could put pressure on transfers from the central government, while some issuers, such as universities and local authorities, could also face the loss of EU funding.
The impact on structured credit quality would likely be small. Given the relatively modest economic impact from Brexit, Moody's would not expect to see significant increases in unemployment and policy rates or declines in property prices.
The general uncertainty following a Brexit vote would likely hit confidence across the EU and could weigh on economic growth. Brexit would also be credit negative for the EU as it could increase the risk of further exits from the bloc and heighten support for independence movements elsewhere.
Full report on Moody's (subscription required)
Related press release: Moody's: Uncertainty is biggest near-term risk from a Brexit for companies in the UK