May 2016 Financial News

Fitch: EU ratings cut likely if UK leaves

May 17, 2016

LONDON—A leading credit ratings agency warned Monday that a British exit from the European Union could eventually lead it to downgrade the ratings of EU countries as well as Britain.

In a report, Fitch Ratings said a vote for so-called Brexit in the referendum on June 23 would weigh on the economies of other EU countries and increase political risks in Europe.

Fitch has already said that a vote for Brexit would trigger a review of Britain’s AA+ rating—code for a potential downgrade.

Though it said no such action would be triggered automatically for the remaining 27 countries of the EU, it warned that “negative actions would become more likely in the medium term if the economic impact were severe or significant political risks materialised.”

The big political worry identified by Fitch is that a British departure from the EU would create a precedent for such a move, possibly boosting the appeal of anti-EU or other populist parties. The precedent could be even more significant if Britain were to thrive outside the EU, Fitch added.

Fitch also noted that a vote for Brexit could also precipitate Scotland leaving Britain, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.

Negotiating the terms of an exit won’t be easy either, and could exhaust the EU’s time and energy and “open up new fronts of disagreement,” Fitch said.

“Brexit could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal,” it said.

Though the potential economic impact of a British exit would be greater for Britain than the EU, Fitch said the impact on the EU would still be “palpable.”

Fitch highlighted the risk of a decrease in EU exports to Britain. The extent of that drop would depend on factors such as the speed and make-up of any ensuing trade deal between Britain and the EU and the extent to which the British pound falls against the euro. A higher euro would make eurozone exports more expensive in Britain.

Fitch said the most exposed countries would be Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to Britain represent at least 8 per cent of their GDP.

The agency said EU countries do stand to make limited gains from a vote for Brexit as companies from around the world opt to invest within the EU rather than Britain. (AP)

Source:
Trinidad Guardian, A18
Tuesday May 17, 2016