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LONDON – The UK has lost its top AAA credit rating from ratings agency S&P following the country’s vote to leave the EU.
S&P said the referendum result could lead to “a deterioration of the UK’s economic performance, including its large financial services sector”.
Earlier the pound plunged to a 31-year low against the dollar, and UK markets closed lower for a second day.
S&P had been the only major agency to maintain a AAA rating for the UK.
On Friday, Moody’s cut the UK’s credit rating outlook to negative.
A rating downgrade can affect how much it costs governments to borrow money in the international financial markets. In theory, a high credit rating means a lower interest rate (and vice versa).
S&P said that the leave result would “weaken the predictability, stability, and effectiveness of policymaking in the UK”.
Ratings agency Moody said that the unpredictability of UK decision-making factored into its move, as did the likelihood of lower economic growth.
“During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth,” the agency said.
Moody’s was the first to take concrete action after the vote, just as it was in 2013 when it was the first to strip Britain of its AAA rating due to slow growth and rising public indebtedness.
Leave supporters largely dismissed warnings about the economic consequences as scaremongering, and were confident Britain would negotiate trade deals and immigration controls superior to those it already has.
But Moody’s said leaving the EU was likely to leave Britain, the world’s fifth-largest economy, with less money to spend on public services.
“The negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget,” it said.
“The UK government has one of the largest budget deficits among advanced economies, and lower GDP growth will further complicate the implementation of the government’s multiyear fiscal consolidation plan,” it added.
The Brexit vote wiped more than $2trn from global equity markets and European stocks ended down 7 percent- the biggest one day fall since 2008.
After a day of turbulent trading, the markets rallied slightly with the FTSE closing down 3.2 percent.
The pound crashed 10 percent against the US dollar to a 31-year low at one point, before rebounding slightly.
The price of gold – a traditional safe haven during volatility – had its best day since 2009 rising 5 percent.
‘Constitutional crisis’
S&P also warned that it expected the UK economic growth to be hit by the outcome of the vote.
The ratings agency said that there was a risk of “a constitutional crisis” if the referendum’s outcome leads to a second referendum on Scottish independence from the UK.
“We take the view that the deep divisions both within the ruling Conservative Party and society as a whole over the european question may not heal quickly and may hamper government stability and complicate policymaking on economic and other matters,” it said.
S&P also warned uncertainty on key issues about the UK’s exit from the EU would hurt investor confidence and put vital external investment “at risk”.
Prime Minister David Cameron, speaking earlier in the Commons said negotiating an exit from the European Union would be the civil service’s most complex and important task for decades.
Mr Cameron, who has said he will step down by October, also told MPs he did not take back the warnings he made during the campaign about the consequences of leaving the EU, saying it would be “difficult” with “challenging new negotiations” ahead.
Meanwhile, Germany, France and Italy have said they will not hold informal talks with the UK until it triggers the official Article 50 mechanism notifying the rest of EU of its intention to leave.
Analysis: Andrew Walker, BBC economics correspondent
Other things being equal, a downgrade can mean higher borrowing costs. But this time other things are not equal at all.
Since the event which led to the downgrade – the referendum – those costs have gone down.
The risk associated with UK government debt or bonds might in some sense be a little higher than before, but they are still seen as a safe investment compared with other assets.
In a situation where investors have become more reluctant to hold risky assets they buy safer ones including government bonds and that tends to lower the interest rate the government has to pay when it next goes to the market to borrow.
And then there is the increased chance that the Bank of England will reduce its own interest rates because of concerns about the economic impact of Brexit. That tends to push government borrowing costs in the same direction. – BBC/Sky News
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