Rating Agencies Downgrade UK in Negative Outlook

Fitch and Standard and Poor have lowered their UK ratings after the decision in last week’s referendum to leave the European Union (EU), which they both believe will have damaging effects on the UK economy.

Standard and Poor have taken more of a stronger stance against the UK, by downgrading them by two notches down to AA from the full triple AAA credit rating the UK now used to hold.
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They cited that  ‘Brexit’ would now lead to a less stable and effective policy framework in the UK, and a marked deterioration in external financing conditions, where the UK has a greater level of gross outward financial requirements as a share of current account receipts and amount of usable reserves, half of the UK’s commercial banks’ funding is denominated in foreign currency.

The UK’s large financial service sector could also be affected by walking away from, Brussels, which is a large employer and significant net contributor to the economy as a whole.

Increased uncertainty surrounding the probable round of  long-lasting negotiations, over what form the U.K.’s new relationship with the EU will look like will also present risks, possibly leading to delays on capital expenditure in an economy that noticeably has a  low investment to GDP ratio.

Fitch have reduced the UK credit rating by a single notch to ‘AA’, down from ‘AA+’, as the ratings agency believe that ‘Brexit’ will induce a sharp slowdown in GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment.

The ratings agency has also revised its forecast for economic growth this year, down to 1.6% from 1.9%, and to 0.9% in 2017 and 2018, a reduction of 2% respectively, resulting in  the level of real GDP a cumulative 2.3% lower in 2018 than in its prior predictions if the UK remained in the UK.

Medium-term growth will also likely be weaker due to less favourable terms for exports to the EU Fitch said, lower immigration and a reduction in foreign direct investment, the plummeting value of sterling and changes in the business environment could also affect growth.

The extent of the medium term shock will depend on the outcome of negotiations, with the remaining members of the EU regarding future trade arrangements, the first indications of how this could work may become clearer today, as the now outgoing UK Prime Minister David Cameron is to meet other European leaders for the first time since the referendum.

Despite the rating agencies opinion, today the pound has made a slight recovery, as the GBP/USD rate has climbed up to $1,33 from the nadir of 1.31 that the pound has fallen to since ‘Brexit’ was decided.

Italy Looks to 40 Billion Euro Bank Bail Out

Italy are now thought to be in the process of preparing a 40 billion euro bail out of their banking system, to cushion against the aftershocks in European markets, due to the UK voting out of the EU.

Many analysts believe that due to ‘Brexit’, euro area GDP will fall alongside that of the UK, and the price of shares in many Italian banks have already started to fall, Italian officials are looking at the possibility of  a direct state recapitalisation of the banks, to be funded by a special bond issue.