- Matt Dunham/AP
Two major rating agencies downgraded the United Kingdom’s credit rating on Monday.
S&P Global Ratings lowered the UK to AA from AAA, with a “negative” outlook. And, Fitch cut its rating to AA from AA+, with a negative outlook as well.
The downgrades come following the UK’s surprise vote to leave the European Union last week.
Brexit “is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK,” S&P said in a statement.
While AA is still a solid rating from both agencies, these actions indicate that they are less confident in the UK’s ability to repay its sovereign debt following the Brexit vote. Over the weekend, several analysts warned about the risk of an outright recession hitting the country, with Goldman Sachs analysts forecasting one next year.
S&P added that the vote for Remain in Scotland and Northern Ireland creates wider constitutional issues for the whole country. The agency pointed out risks to the pound’s role as a reserve currency; it suffered its biggest plunge ever against the dollar on Friday.
“The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the UK if there is another referendum on Scottish independence,” S&P said.
In its statement, Fitch said the referendum outcome will cause a sudden slowdown in short-term GDP growth, and discourage business investment.
Fitch also lowered its GDP forecast to 1.6% in 2016 from 1.9%, and 0.9% in 2017 from 2%. In the medium term, Fitch is concerned that less favorable trade terms for exports to the EU, lower immigration, and reduced foreign direct investment would dampen growth.
On Friday, Moody’s Investors Service, another ratings agency, lowered its outlook on the UK’s credit rating to “negative” from “stable.”