Two credit ratings agencies warn of UK 'Brexit' risk

By William Schomberg and David Milliken

LONDON (Reuters) - Two credit rating agencies said on Friday that Britain risked a hit to its creditworthiness and possibly a downgrade due to Prime Minister David Cameron's decision to hold a vote on whether to leave the European Union.

Shortly after the International Monetary Fund said the referendum could hurt Britain's growth prospects, Standard & Poor's said it was keeping its outlook for Britain's top-notch rating at negative, while Fitch affirmed a rating that was one notch weaker.

S&P reiterated its decision in June to put the country on notice that it faced a one-in-three chance of a downgrade in the next two years, and Fitch said a vote to leave would be "moderately negative" and could trigger a move by Scotland to leave the United Kingdom.

S&P challenged one of the main arguments of supporters of a British exit from the EU, saying immigration had been positive overall for the economy over the past decade.

It repeated its view that the referendum represented a risk to Britain's large financial services sector, its exports, and the wider economy. If Britain quit the EU, it could jeopardize its ability to fund a large deficit in its balance of payments.

"In a worst-case scenario, a Brexit could also harm the sterling's role as a global reserve currency, removing what has been a significant support for our 'AAA' rating on the U.K. since the start of the global financial crisis," it said.

S&P said it expected Britain's government would reach a compromise with the rest of the EU on reforms of the bloc in the first half of next year and both agencies said most voters in Britain would reject a so-called 'Brexit' in the referendum.

But S&P noted that the 'leave' campaign was better funded and organized than the 'remain' campaign, raising the risk of a vote to leave the EU.

S&P's chief European sovereign rating officer told Reuters in October that Britain's credit rating could be cut by as much as two notches if it leaves the EU.

Fitch said the outcome of Britain leaving the European Union was highly uncertain, and would hinge on lengthy, complex talks.

"The implications for the rating would depend on several factors, including the impact on medium-term growth and investment prospects, the UK's external position, and the risk of triggering a second referendum on Scottish independence," Fitch said.

A separate plan to devolve powers to Scotland and Wales could distract the government from fixing some fundamental problems in the economy such as a shortage of new housing which would hurt Britain's competitiveness, S&P said on Friday.

(David Milliken)

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