Moody’s: ‘Substantial’ risk Brexit talks will fail

Moody’s has warned many UK issuers are unprepared for the substantial risk that the country will leave the European Union without a deal reverting to WTO rules.

The ratings agency says “no deal” would create significant macroeconomic disruption with companies reliant on just-in-time supply chains among the most vulnerable sectors as well as airports and aviation.

No deal could result in an overnight loss of air travel rights with countries in Europe and beyond.

The UK would likely see slower growth or outright recession, further pressure on the pound, higher unemployment and higher inflation, while restrictions on immigration could exacerbate skill shortages.

It would be “significantly” credit negative for some UK-based issuers, Moody’s says in the report, Cross-Sector — UK: ‘No deal’ Brexit.

Moody’s managing director Colin Ellis says the agency expects the UK and EU to reach an arrangement that captures many, but not all, their currency trade arrangements. “But the probability that negotiations will fail and no agreement will be reached is substantial,” Ellis says.

Moody’s says some rated entities it monitors are working on the assumption that mutual interest must ensure that the UK and EU will reach a new agreement and these issuers have failed to make contingency plans as a result.

It warns that these issuers are ignoring the risk that politics could trump economic incentives and result in sub-optimal outcomes from Brexit.

For some companies the outcome from no deal would be “so significant that it is difficult to quantify”, Moody’s says.

Due to swift contingency planning, banks would face a negative but manageable impact from a no deal Brexit, Moody’s says.

This is despite the fact Moody’s does not expect the UK to retain current passporting or even negotiate equivalence due to proposed policy changes.

PwC today warned that the UK faces a risk of recession as early as next year if it makes little progress in early Brexit negotiations with the European Union.