No-Deal Brexit Risk Now U.K. Rating Issue, S&P Says; Pound Drops

(Bloomberg) -- The risk of the U.K. leaving the European Union without a trade deal has sufficiently increased to affect the country’s credit rating, according to S&P. The pound fell.

A no-deal Brexit would result in a “moderate recession” for as many as five quarters in the U.K., with the economy contracting by 1.2 percent in 2019 and 1.5 percent in 2020, the ratings company said in a statement Tuesday. In such a scenario, unemployment would rise from record-low levels to more than 7 percent by 2020 -- a level not seen since the financial crisis, S&P said.

British Prime Minister Theresa May is stuck in a deadlock as her attempts to reach a compromise with the EU -- primarily on the issue of avoiding customs checks at the Irish border -- has been blocked by her own party members. S&P’s warnings were more severe than prior estimates, with the National Institute of Economic and Social Research saying last week the U.K. economy could come to a standstill next year if the divorce goes through without a deal.

“The risk of a no-deal has increased sufficiently to become a relevant rating consideration,” said Paul Watters, a credit analyst with S&P. “This reflects the inability thus far of the U.K. and EU to reach agreement on the Northern Irish border issue, the critical outstanding component of the proposed Withdrawal Treaty.”

The pound extended a decline after the report, and was 0.7 percent lower $1.2711 as of 5:25 p.m. in London. A move below $1.2662 would take sterling to the weakest since June 2017.

S&P’s comments echo warnings made before the 2016 referendum, which predicted that a vote for Brexit would push the economy into recession. Although the nation has avoided a contraction, leading pro-Brexit lawmakers to deride the warnings a part of “project fear,” U.K. growth has slowed from one of the highest rates among major economies to one of the lowest.

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