Brexit: UK credit rating 'risks being downgraded again if Theresa May doesn't get a single market deal'

Moody’s downgraded its outlook on the UK to “negative” from “stable” on the day after the EU referendum

The ratings agency has already downgraded Britain, on the day after the referendum (AFP)

Britain could suffer another credit rating downgrade if Prime Minister Theresa May fails to secure a deal allowing the UK to preserve “core” elements of its access to the EU single market after it leaves the bloc, ratings agency Moody’s has warned.

Moody’s downgraded its outlook on the UK to “negative” from “stable” the day after the EU referendum in June. The agency warned Britain's economic growth will be weaker, its economic policymaking may be diminished and the Government's fiscal strength reduced following the UK’s decision to leave the EU.

In a report released on Wednesday, Moody’s has said it will downgrade the UK’s sovereign rating if Brexit leads to a loss of access to the single market, as this would materially damage growth.

Kathrin Muehlbronner, senior vice-president at Moody’s Investors Service, said: “We would downgrade the UK’s sovereign rating if the outcome of the negotiations with the EU was a loss of access to the Single Market as this would materially damage its medium-term growth prospects.”

“A second trigger for a downgrade would be if we were to conclude that the credibility of the UK’s fiscal policy had been tarnished as a result of Brexit or other reasons.”

“Put simply, the closer the UK’s new trade relationship with the EU resembles the current privileged access, the more limited the conomic impact of Brexit will be for the UK and vice versa.”

Moody’s currently rates the UK as AA1, which is the second-highest rating.

The agency said the loss of passporting rights, which allow financial services to sell their services freely across the rest of the EU and give firms based in Europe unfettered access to Britain, would be credit negative but not sufficient to prompt a downgrade.

“The greatest impact would be felt through higher costs and increased inefficiency as companies restructure, leading to reduced profitability for some time,” Ms Muehlbronner said.

Moody’s current baseline expectation is that the UK will eventually manage to enter some form of free trade agreement with the EU.

However, it said that such an outcome is far from certain and it does not expect to have clarity on the UK’s objectives or its chances of achieving them, until the negotiations are under way in March next year.

Ms May has predicted “difficult moments” ahead in Brexit negotiations but said she is optimistic she can get a deal “that is right for the UK”.

She said she aimed to “cement Britain as a close partner of the EU once we have left”, with the country able to control its immigration but trade freely with the EU.

However, European politicians have dismissed claims that the UK could “have its cake and eat it”.

Donald Tusk, president of the European Council, said there could be “no compromises” on retaining benefits such as access to the single market and customs union, while rejecting the free movement of people.