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Moody’s assigned a negative outlook to its ‘Aa1’ rating for British government debt after a Thursday referendum showed that a clear majority of Britons wanted to leave the EU, prompting Prime MinisterDavid Cameron to announce he would resign.
“During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth,” the agency said.
Britain’s finance ministry and central bank had warned voters the country would face a major economic hit if it left the EU after more than 40 years as a member, and sterling on Friday fell to its lowest against the dollar since 1985.
Rival credit ratings agency Standard & Poor’s – the only major one to still assign Britain a top-notch triple-A grade – said before Thursday’s referendum that Britain was likely to face a downgrade if it voted to leave, and Fitch Ratings said on Friday that the vote would be “moderately negative”.
But Moody’s was the first to take concrete action after the vote, just as it was in 2013 when it was the first to strip Britain of its ‘AAA’ credit rating due to slow growth and rising public indebtedness.
The decision to leave the EU raised questions over Britain’s hitherto high-quality economic policymaking, Moody’s said.
“Policy predictability and effectiveness of economic policymaking … might be somewhat diminished,” Moody’s said. “The challenges for policymakers and officials will be substantial.”
Protracted trade talks, slow growth or heightened pressures on sterling could all trigger a downgrade, Moody’s said.
Supporters of Britain leaving the EU have largely dismissed warnings about the economic consequences as scaremongering, and are confident Britain will negotiate trade deals and immigration controls superior to those it already has.
But Moody’s said leaving the EU was likely to leave Britain with less money to spend on public services.
“The negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget,” it said.
“The UK government has one of the largest budget deficits among advanced economies, and lower GDP growth will further complicate the implementation of the government’s multiyear fiscal consolidation plan,” it added.
Finance minister George Osborne – who opposed leaving the EU – said before the vote that he might have to impose extra spending cuts or tax rises if Britain voted to leave.
But now Osborne’s own political future is uncertain after his ally Cameron promised to step down in October.