If the UK leaves the EU it would be negative for the UK economy in the short and possibly medium-term, Moody’s has predicted.
The rating agency is considering assigning a negative outlook to the UK’s rating in case of a vote to exit, to reflect “expectation of lower economic growth and a potentially lengthy period of uncertainty”.
The UK will hold its referendum a potential British exit, or "Brexit", from the EU probably sometime next year, or by end-2017 at the latest.
The UK Prime Minister recently outlined his key requests for a “reformed” EU, on which he intends to campaign for a vote to stay in.
Whether an exit would lead to a downgrade from the UK’s Aa1 credit rating depends on new trade arrangements that the UK would be able to negotiate with the EU, as well as on other policy decisions in the aftermath of a potential exit.
Moody’s argued that trade and investment would be hit, in
“These challenges would likely outweigh the benefits of cost savings on the government’s contributions to the EU budget and the need for businesses to comply with EU regulation."
The medium-term economic outlook would hang on the new trade arrangement that the UK would be able to negotiate with the EU.
A Swiss-style set of bilateral agreements or a more comprehensive free trade agreement could replicate many of the advantages of EU membership.
“Neither will be easy or quick to
Other policy decisions around trade and regulation would also have an important impact on the UK’s medium-term growth prospects.
The potential “Brexit” would increase domestic political risk and might cut the predictability and effectiveness of economic policy-making.
The UK government would need to renegotiate a large volume of trade agreements with other countries and regions, besides negotiating with the EU, Moody’s noted.
“While we consider the UK’s institutional strength to be very high, the challenges for policy-makers would be substantial,” said the rating agency.
The rating agency said that the longer-term impact on the UK’s sovereign rating would depend on how well the UK's post-exit policies, in such a scenario, could compensate for the loss of unimpeded access to the single market of the EU.