After Moody’s and S&P, Fitch downgrades post-Brexit UK
28 Jun 2016
Ratings agency Fitch has downgraded both the UK's long-term foreign and local currency issuer default ratings and the issue ratings on the UK's senior unsecured foreign and local currency bonds from AA+ to AA.
Earlier, both Standard and Poor's and Moody's had also cut the UK's ratings following its decision to exit the European Union.
Fitch said the UK's vote to leave the EU will induce an "abrupt slowdown" in short-term GDP growth as businesses defer investment and consider changes to the UK's legal and regulatory environment.
As a result, it has also revised down its forecast for real GDP growth for 2016 from 1.9 per cent to 1.6 per cent, and from 2 per cent to 0.9 per cent in 2017.
Despite the downgrades, the pound sterling and UK stocks clawed back some ground this morning following two days of turmoil in the wake of the Brexit vote.
Monday saw the pound slump to a fresh 31-year low against the dollar, but this morning it had moved higher to trade at $1.33.
The FTSE 100 was up 2.2 per cent at 8.30am, with every stock in positive territory, after a 2.6 per cent fall for the index in the previous session.
Fitch said medium-term growth is also likely to be weaker due to less favourable terms for EU exports, although it added that the extent of this depends on the nature of any future trade agreements with the EU.
The agency also said the current market volatility in the market is likely to "abate" in due course, due to high levels of bank liquidity, even though some financials and housebuilders fell by around 20 per cent on Monday, the second day of trading since the Brexit result was announced.
At one point, Royal Bank of Scotland shares dropped to their lowest level since January 2009, down nearly 20 per cent to 164.8p. Meanwhile, Barclays is down 15 per cent and Lloyds Banking Group is nearly 10 per cent lower.
"Banks are liquid and were well prepared to withstand market volatility that could limit their access to funding for a period of time," said Fitch.
"Central bank funding provides them with a further line of defence in case of more protracted market closure.
"Banks have an aggregate Tier 1 capital ratio of 13.8 per cent, higher than the Bank of England's view on steady state capital requirements of around 11 per cent."
The move follows the announcement from ratings agency Standard & Poor's which on Monday night cut the UK's sovereign credit rating by two notches from AAA to AA with a negative outlook.
S&P warned the referendum result could lead to "a deterioration of the UK's economic performance, including its large financial services sector".
Moody's also cut the UK's credit rating from 'stable' to 'negative' stating the referendum result would herald a "prolonged period of uncertainty"(See: Moody's downgrades UK's credit outlook to 'negative').
Like Fitch, it warned the 'leave' vote would have "negative implications for the country's medium-term growth outlook".
