Shouting doesn’t impress anyone, particularly the canny British voter. It is the quiet voice full of common sense and real stats that impresses and can be really scary. In the ‘Brexit?’ session at the ACT Annual Conference last month, Moritz Kraemer, Global Rating Officer, Sovereign Ratings, Standard & Poor, was really scary as he explained quietly and clearly, that if there is Brexit, S&P will downgrade Britain’s by at least one notch and potentially more. 

Kraemer believes that the stakes are much higher this time as the level of integration is now considerably higher than in 1975, and also we don’t actually know what the alternative is to the EU. Even the Brexiters don’t know what they want to replace the status quo with. He predicts that if the vote is for Brexit on June 23rd:

• the uncertainty begins on June 24th when the downgrading will start
• it will take at least two years to leave EU, and probably longer
• it will take a least a decade to negotiate a new treaty with the remaining 27 EU states
• a new government will be needed in the UK but it will be riddled with discontent and discrimination
• a clean and complete break with the EU is possible, although unlikely as UK needs the EU and new government will not have mandate to make complete break
• funding the UK imbalance of payments position (5% of GDP, £100bn/year) is heavily dependent on internal investment in the UK, but there will be a long period of uncertainty which will reduce the long term investment in the UK
• in terms of net debt the UK is the 2nd most indebted country in the world, and so heavily dependent on foreign investor confidence which will probably decline if Brexit happens
• Sterling’s reserve currency status (which some estimate as being worth 0.5% of GDP) would be at risk.

His closing comment was, “The reason we think the rating of the UK would no longer be a Triple A is that there would be: an increasing risk to the effectiveness, transparency and predictability of policies which have been a key strength in the past - the string of referenda has started this decline and decision making will become very hard and accident prone; growth and investment will be at risk and will increase - investors will wait until the dust settles (for many years) before they come back in; increased balance of payments risk combined with the possible loss to reserve currency status and its impact on the cost of the current account deficit. These risks are not present in other AAA rated sovereigns and if the UK votes to leave the EU, there would be one less AAA rated country.”