UK Credit Ratings Drop After Brexit Vote

Leading up to and following the Brexit vote, many wondered how and what effect it would have on the finances of the United Kingdom. As of Monday, some are calling it “Bregrexit”, with markets down around the world, reflecting the lack of a plan and a feeling of regret by some on the leave side.
Several ratings agencies have lowered or downgraded their credit ratings. Where the UK had previously enjoyed a top AAA credit rating from ratings agency S&P, the nation had been downgraded by two notches to AA. Comparatively, the US was downgraded only one notch in August of 2011, and is still at excellent with AA+.
AAA is the highest credit rating assigned by the S&P, where they believe “the obligor’s capacity to meet its financial commitments on the obligation is extremely strong. AA differs from the highest-rated debt only to a small degree. The obligor’s capacity to meet its financial commitments...is very strong.”
The downgrade is two notches because each ratings comes with a plus or minus to indicate relative strength in the category. See S&P Global for more information.
Fitch Ratings issued reports Monday afternoon saying they had downgraded the UK’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) from AA+ to AA. They also remarked that the outlooks were negative.
Fitch Ratings’ reasoning behind all of this negativity can be read in its entirety at Fitch Ratings. It tells of an abrupt slowdown in short-term GDP growth, with the forecast for 2016 at 1.6 percent instead of 1.9 percent, followed by 0.9 percent in 2017 and 2018.
From a report from the BBC, these downgrades have occurred even after UK Chancellor George Osborne said the UK would face the future “from a position of strength”. Osborne spoke earlier, attempting to calm the markets, saying the economy would need to “adjust” but was strong enough to cope.
Until Monday afternoon, S&P had been the only major agency maintaining a AAA rating for the UK. They had remarked that the leave result would “weaken the predictability, stability and effectiveness of policymaking in the UK.”
Last Friday, the third of the three main ratings agencies had already cut UK’s credit outlook to negative. Moody’s currently gives the UK a credit score of Aa1, which is high grade and below AAA, which is prime.
What does all of this mean to people in the UK? It is similar to when anyone wants to borrow money. The higher the credit score, the lower the interest rate. This would usually mean higher borrowing costs, which would be felt by government, businesses and households in the longer term. It is interesting to see the comments from Presidents and Prime Ministers around the Globe concerning the UK Exit from the EU. Many show concern for the uncertainty of what this move means to not only Europe, but also the world.
The UK financial markets remain volatile, while EU leaders say they will not hold informal talks with the UK until it officially tells them of its exit. The whole thing sounds like a long and messy divorce.

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