S&P Signals Downgrade in U.K. Credit Rating

The "Brexit" will deter investment in the U.K.'s economy and put its financial sector at a competitive disadvantage, S&P predicts.
Matthew HellerJune 24, 2016

S&P Global Ratings said Friday it will review its U.K. credit ratings following the country’s vote to leave the European Union, with a slowdown in corporate investment in the U.K. being a particular concern.

A downgrade in Britain’s AAA sovereign rating appears likely, as S&P has previously indicated it would lower the rating if it believed that the U.K.’s institutional strength and  ability to formulate policy conducive to sustainable growth were negatively affected by an EU exit.

“A vote to leave would, in our view, deter investment in the economy, decrease official demand for sterling reserves, and put the U.K.’s financial services sector at a competitive disadvantage compared with other global financial centers,” S&P said in a news release.

The rating agency sees the effects of a leave vote on U.K. banks as indirect, arising from potential adverse consequences for economic activity, new business volumes, asset prices, and demand for U.K.-related debt.

“U.K. banks’ liquidity buffers provide a sizable cushion  against market volatility, as does the Bank of England’s previously announced  contingency measures to ensure sufficient banking system liquidity,” S&P said. “That said, volatility may interrupt wholesale debt issuance and affect the values of financial assets in the near term.”

In the immediate aftermath of the Brexit vote, S&P forecasts a slowdown in inbound foreign direct investment, a weakening of real estate markets, and some loss of business and consumer confidence.

“A curtailment in corporate investment in the  U.K. over the medium term is a key concern as that would likely weaken innovation, slow improvements in operating efficiency and, ultimately, impair the competitiveness of British manufacturing and service industries versus peers abroad,” it said.

Fitch Ratings and Moody’s Investors Service downgraded the U.K. to their second-highest levels in 2013.