S&P keeps negative outlook on UK sovereign rating after Brexit vote

October 28, 2016 1:44 PM EDT

A man walks past the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid


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By David Milliken

LONDON (Reuters) - Ratings agency Standard & Poor's said on Friday Britain's sovereign credit rating remained at risk of a further downgrade because of ongoing uncertainty about the country's future outside the European Union.

"In our opinion, Brexit presents a significant risk to the UK's track record of strong economic performance, and to its large financial sector in particular," S&P said, as June's vote had created "a less predictable and stable policy framework".

S&P stripped Britain of its triple-A credit rating on June 27, describing the vote to leave the EU as a "seminal" event after it downgraded the country's rating by two notches to AA.

Factors that could trigger a further downgrade include weaker-than-expected growth, a decision by foreign central banks to sell some of their holdings of sterling or a new referendum on Scottish independence, the ratings agency said.

British government debt remains comfortably within investment-grade territory and financial markets have reacted little to past downgrades of major sovereign borrowers.

But any future downgrade would still embarrass the Conservative government, which placed a heavy weight on keeping a triple-A rating in the years after the financial crisis.

Prime Minister Theresa May said earlier this month that she would start two years of formal talks to leave the EU early next year, but S&P said that may be too short to reach a good deal.

"The negotiation process is therefore fraught with potential challenges and vetoes, making the outcome unpredictable," it said. "The risks of an inconclusive or detrimental outcome are ... material."

S&P forecast British economic growth would average 1 percent a year from 2017 to 2019 - little changed from its outlook in June - but said it could downgrade Britain's rating again if growth proved markedly weaker.

New finance minister Philip Hammond will make his first budget statement on Nov. 23 and is expected to announce more government borrowing because of a weaker economic outlook, which is already putting upward pressure on UK borrowing costs.

S&P said it expected the ratio of Britain's general government debt to its gross domestic product to reach a "high" 85 percent this year. Slower growth and political pressure to spend more may well hamper deficit reduction further, it said.

Confidence in sterling as a stable reserve currency had also been damaged by its fall against the dollar and the euro since the Brexit vote, S&P said.

If sterling's share of foreign central banks' reserve holdings fell below 3 percent - from 4.7 percent before the vote - that could justify a ratings downgrade, S&P said.

Meanwhile, political difficulties linked to divisions within the ruling Conservative Party, a likely second referendum on Scottish independence and issues over Northern Ireland's status would probably distract the government from economic goals.

(Reporting by David Milliken; editing by Stephen Addison, Larry King)



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