UK Suffers Credit Downgrade

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The confounding effects of the Brexit have caught up with the United Kingdom. As the country tries to untangle itself from most of its decades-long relationship with the European Union, Moody’s decided its economic future has become riskier. Moody’s downgraded its sovereign debt to Aa2 from Aa1.

In a note to investors, Moody’s analysts explained why they took the action:

1. The outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise;

2. Fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union (EU), and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.

The extent to which these negotiations will hurt Britain’s trade with the EU is far from certain. Some EU governments want to make the United Kingdom’s exit particularly hard on it. Germany is among these. The Independent wrote recently:

German voters have been left unmoved by Theresa May’s plea for the UK to remain in the single market during a transition period as she set out her vision for Brexit two days before the country was due to go the polls.

In a landmark speech in Florence, Italy, Ms May said existing market arrangements should continue to apply during a period of about two years after Brexit is to come into effect on 29 March 2019.

May will be blamed if the U.K. economy is undermined by Brexit. Her position has prime minister is already unsteady.

The Moody’s decision on the United Kingdom also may speed the exit of major financial institutions from London and their relocation to several large EU cities, led by Frankfurt. Downgrades never come at a good time, but the Moody’s decision makes the acute problem of Brexit worse.