Last Thursday, Fitch, a ratings agency, said that it predicts that a growing risk of a bitter and economically damaging Brexit that could result to a further downgrade of the sovereign credit rating of the United Kingdom.
In an update over its views on how Brexit may affect the economy and public finances of the United Kingdom, Fitch stated: “We no longer believe it is appropriate to identify a specific base case.”
It added: “An acrimonious and disruptive ‘no deal’ Brexit is a material and growing possibility.”
Previously, Fitch had expected that the United Kingdom would leave the European Union in March 2019 with a transition deal in place and an established framework over a future trade deal with the bloc.
However, Theresa May, the British Prime Minister, is having a hard time getting her own Conservative Party to back her proposed Brexit deal, while the European Union has expressed objections to some key parts of her plan, insinuating that it will seek more concessions that could expand the divide within the Conservatives.
Fitch stated: “An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability.”
This month, Mark Carney, the Governor of the Bank of England, said that the possibility of a no-deal Brexit was “uncomfortably high.” Alos, Liam Fox, the trade minister of the United Kingdom, placed the probability at 60 percent, which helped send the sterling to a 14-month low against the U.S. dollar.
It said that an unfavourable Brexit scenario that sharply delayed growth would likely push up the budget deficit of the United Kingdom towards 2.5 percent of the gross domestic product, indicating that the debt-to-GDP ratio would drop by less than expected in the period between 2019 and 2020.
Fitch added: “A severe enough shock could reverse the downward trajectory in the ratio since 2015. Worsening public finances leading to a rising government debt ratio could also lead to a downgrade of the UK.”
Currently, the ratings agency rates the debt of the British government at AA with a negative outlook which suggests that a further lowering of the rating may be possible. Fitch cut its top-notch AAA rating on the United Kingdom in 2013 after citing the weaker outlook on public finances.