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Abu Dhabi, UAEWednesday 14 November 2018

Fitch says disastrous 'no-deal' Brexit a growing possibility

Crashing out of EU without transition plan in place would put Britain's sovereign credit rating at risk, ratings agency warns

If UK leaves without transition deal in place, economic effects could be significant, ratings agency says. EPA
If UK leaves without transition deal in place, economic effects could be significant, ratings agency says. EPA

Ratings agency Fitch said on Thursday that it saw a growing risk of a bitter and economically damaging Brexit that could lead to a further downgrade of Britain's sovereign credit rating.

"We no longer believe it is appropriate to identify a specific base case," Fitch said in an update on its views on how Brexit might affect Britain's economy and public finances.

"An acrimonious and disruptive 'no deal' Brexit is a material and growing possibility," it said.

Previously Fitch had assumed Britain would leave the EU in March next year with a transition deal in place and the outline of a future trade deal with the bloc.

However, British Prime Minister Theresa May is struggling to persuade her own Conservative Party to support her proposed Brexit deal, while the EU has raised objections to key parts of her plan, suggesting it will seek more concessions that could deepen the divide within the Conservatives.

"An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability," Fitch said.

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Bank of England governor Mark Carney said this month that the possibility of a no-deal Brexit was "uncomfortably high" and British trade minister Liam Fox put the chance at 60 per cent, helping send sterling to a 14-month low against the US dollar.

An adverse Brexit scenario that slowed growth sharply could push up Britain's budget deficit towards 2.5 per cent of gross domestic product, meaning the debt-to-GDP ratio would decline by less than expected over 2019 and 2020, it said.

"A severe enough shock could reverse the downward trajectory in the ratio since 2015. Worsening public finances leading to a rising government debt ratio could also lead to a downgrade of the UK," Fitch said.

The ratings agency currently rates British government debt at AA with a negative outlook, which means a further lowering of the rating is possible. Fitch cut its top-notch AAA rating on Britain in 2013, citing the weaker public finances outlook.