LONDON – Two major ratings agencies have warned that the UK’s creditworthiness faces a downgrade following the shock failure of the Conservative Party to win a majority in Thursday’s general election.
Both Moody’s and Standard & Poor’s issued statements on Friday morning saying they will reassess the UK’s credit rating going forward after the result of election took an unexpected turn.
Theresa May’s Conservatives won the most seats but failed to secure a majority, and look likely to enter an informal coalition with the Northern Irish Democratic Unionist Party. This will give May a majority of just a couple of seats. That could make passing legislation incredibly difficult, especially when it comes to Brexit.
Consequently, both agencies have made clear their willingness to lower the UK’s credit rating if circumstances deteriorate. As it stands, the UK holds the second highest rating with both agencies – Aa1 from Moody’s, and AA+ from S&P.
Britain lost its AAA rating with S&P almost immediately after the Brexit referendum last year. It has held an Aa1 rating with Moody’s since 2013 when it was downgraded from AAA due to sluggish growth prospects and fiscal challenges.
“Moody’s is monitoring the UK’s process of forming a new government and will assess the credit implications in due course,” Kathrin Muehlbronner, the agency’s lead UK sovereign analyst said in a statement earlier on Friday morning.
“As previously stated, the future path of the UK sovereign rating will be largely driven by two factors: first, the outcome of the UK’s negotiations on leaving the European Union and the implications this has for the country’s growth outlook. Second, fiscal developments, given the country’s fiscal deficit and rising public debt.”
S&P was even more downbeat, with Moritz Kraemer, its sovereign chief ratings officer, telling CNBC: “We have the outlook on the ratings still on negative indicating that further downgrade or downgrades could be in the wings going forward.
“This depends pretty much on the further outcome of the Brexit negotiations and the reality that the UK will face outside the EU, which is still uncertain.”
A ratings downgrade would not merely be a symbolic gesture from the agencies, but would also materially impact the UK’s ability to access financing. The lower a country’s credit rating is, the higher interest rates it must pay when accessing debt in the markets.
It can also become more difficult to find entities willing to provide funding, although it is worth remembering that even if downgraded a notch Britain’s rating with both agencies would still be among the highest in the world.