Britain leaving EU would affect credit rating, says Moody's

Agency says Brexit would close UK off from common market, trade opportunities and protections, and put pressure on the pound

A vote to leave the EU could cut the UK's credit rating, according to the ratings agency Moody's, which has waded into the debate with a warning about rushing the referendum.

The agency, which rates UK government debt one notch below the top triple-A score, says holding a referendum on EU membership next year would cut the period of uncertainty but at the same time would allow less time to negotiate reforms with Brussels.

In Moody's view, a shorter time frame increases the risk that the UK government will not manage to secure the changes that it is seeking, which in turn may negatively influence the government's willingness to support remaining in the EU," the agency says in an update on the UK.

While the outcome of the referendum remains uncertain, Moody's believes that a withdrawal from the EU would have negative implications for the UK's growth prospects and - in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU's single market - would likely put pressure on the UK's sovereign rating.

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Moody's believes that the government will indeed manage to reduce the budget deficit substantially over the coming years, given its commitment as well as robust GDP growth and a continuing low interest-rate and inflation environment," says the report, by senior credit officer Kathrin Muehlbronner.

At the same time, the rating agency believes that achieving the spending cuts targeted by the government might be difficult to achieve in full, and the agency therefore expects a more moderate reduction in the budget deficit, to just above 1% of GDP by the end of this parliament.

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The UK's economic growth pattern remains relatively unbalanced and mainly driven by domestic demand and the services sector, while exports and manufacturing remain subdued.

Longer-term growth challenges for the UK economy might arise if the weak productivity performance of the past several years persists.