DBRS Commentary: Vote to Leave Europe Likely to Trigger Years of Uncertainty for UK

DBRS, Inc. has today released a commentary entitled “Vote to Leave Europe Likely to Trigger Years of Uncertainty for UK.” This is the first of three commentaries that DBRS intends to write on the impact of a possible British exit from the European Union. This commentary addresses the impact on the United Kingdom. The following two will address the impact on Europe, and on the rest of the world. Addressing the impact of the referendum on the UK, this commentary discusses the following points:

-- The United Kingdom will hold a referendum on June 23 on whether or not to remain in the European Union. A vote to leave the EU would likely increase financial market volatility, weaken the currency, lower capital inflows, deepen the economic slowdown, and raise questions about Britain’s longstanding relations with Europe. However, we do not anticipate that the government’s capacity to pay its debt in the period directly following the vote would significantly decline. Therefore, it is not likely that we would immediately follow the referendum by downgrading our AAA credit ratings on the UK.

-- Longer term, whether the Treasury’s repayment capacity would decline is less clear. A vote to leave the EU would likely set in motion years of uncertainty over Britain’s trade arrangements with the EU, the legal status of foreign workers in the UK and British workers in the EU, the attractiveness of the UK as a financial center and destination for investment, and the UK’s own unity. If over time these factors resulted in higher interest rates, lower growth and a weaker currency, driving up Treasury yields, this could erode the government’s capacity to pay its debt, putting downward pressure on the ratings.

-- A vote to remain in the EU, a scenario we view as better for the UK, could lead to a relief rally in the markets and an eventual economic recovery. Nevertheless, popular frustration among the ‘Leave’ voters over immigration, European regulations, and the cost of EU membership would likely remain. How the UK addresses these issues will be important to the future direction of the country.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

A copy of this commentary is available by clicking on the link below or by contacting us at info@dbrs.com.