Industry plays down Moody’s Brexit fears

It is too soon to tell the impact of any Brexit, say experts, despite a Moody’s report warning that an early referendum on the UK’s EU membership could put Britain’s sovereign rating at risk.

A report on the upcoming risks for the UK by Moody’s identifies a 2016 referendum as potentaily hazardous for the UK. The ratings agency argues that it reduces the time available for negotiations with the EU on “the reforms and repatriation of powers sought by the UK government”.

“In Moody’s view, a shorter timeframe increases the risk that the UK government will not manage to secure the changes that it is seeking, which in turn may negatively influence the government’s willingness to support remaining in the EU,” says the report.

However, those in the industry think it’s too soon to tell the impact of a referendum, early or not, as it is still unclear which way the British people will vote.

“I don’t think anyone can claim to know anywhere near the full implications of withdrawal from Europe, however markets and people like Moody’s are likely to react negatively to any prospect of change,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “It’s a Herculean task to calculate the lasting impact of a Brexit. I would note even Moody’s report does well to get a firm footing on the fence.”

Shorter-term, if the opinion polls show the British people will vote to stay in the union there will be minimal change, while an uncertain outcome to the vote could leave markets “a bit jittery”, says Khalaf.

Currently the market has not even factored in Britain exiting the EU, says Jonathan Davis, managing director at Jonathan Davis Wealth Management. “If the market takes a negative position on UK Gilts then we will see this in rates rising and Gilts falling. The recent fall in prices was replicated across western government bonds, so the UK has not been singled out.”

Steven Grahame, manager of the IFSL North Row Liquid Property Fund, agrees that the current discussion around any Brexit will not have “any real impact on the markets”. “As Cameron continues negotiations for a better deal for the UK, all sides of the negotiating table seem to be in agreement that it would be better for the UK to remain a part of the EU, giving the prime minister added leverage,” he adds.

Should a Brexit occur it’s not all doom and gloom, argues Davis, and he views it as a positive move for UK growth, although negative for Gilts amid likely highly inflation following an EU exit.

However, Moody’s disagrees, saying that a withdrawal from the EU “would have negative implications for the UK’s growth prospects and – in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU’s single market – would likely put pressure on the UK’s sovereign rating”. 

Earlier this year, Moody’s said the possibility of a Brexit was greater than the risk from the then-upcoming general election. “As the EU accounts for around 50 per cent of the UK’s goods and 36 per cent of its services exports, a withdrawal from the EU could have negative implications for trade and investment, both ahead of the event and following it,” it said at the time.