The economic fallout from Britain’s surprise decision to leave the European Union could continue for a while, with Moody’s lowering the country’s long-term issuer and debt rating from “stable” to “negative.”
The rating affects rates the UK must pay to borrow money. Both Moody’s and competitor Fitch had already set Britain’s credit rating at Aa1 (the second-highest level under AAA) before Thursday’s referendum, but the outcome will see the rating continue — or even drop further.
Rival ratings agency Standard and Poor’s still has the UK at AAA, though is understood to be revising its outlook over the next day or two.
Uncertainty Causes Economic Turmoil, UK Credit Rating Downgraded
Although the UK has not yet made any legal moves towards exiting the EU, its long-term debt and issuer ratings reflect a period of economic uncertainty that is likely to follow the exit.
It will now have to re-negotiate its trade and economic ties to the EU, which could take years to decide.
While the EU is likely to want Britain’s co-operation on some level to meet its own economic goals, a desire for retribution among Europe’s central planners against Britain for destabilizing the EU masterplan could overshadow discussions.
As well as the uncertainty Britain faces after a majority of its voters chose to leave the EU, it also faces pressure from constituent country Scotland (which voted overwhelmingly to remain) for another independence referendum, potentially breaking up the country.
UK Prime Minister of six years, David Cameron, also resigned his post, claiming he did not wish to play any part in exit negotiations. His replacement will probably not be decided for a number of months.
The British pound plummeted to $1.35 USD in the immediate wake of these events last week, its lowest level since 1985.
Britain and the EU
The UK has been a member of the European Union — originally joining the European Economic Community in 1973 — for over 43 years. The European Union itself was created in 1992 and has existed in its current legal incarnation since 2007.
What Are the Ratings Agencies?
The “big three” credit ratings agencies: Moody’s, Standard & Poor’s and Fitch, issue ratings supposedly based on the level of risk lenders take on in issuing debt to countries and corporations.
All three agencies came under fire in the wake of the global financial crisis of the late 00s, after they issued favorable ratings to financial institutions later discovered to be insolvent.
EU officials accused the three agencies of exacerbating the European sovereign debt crisis that affected countries like Ireland and Greece. The US and EU subsequently increased regulation of the agencies in an attempt to increase transparency.
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