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Moody’s Warns U.K. Deadline to Reach EU Deal Risks Credit View

John Ainger

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Moody’s Investors Service warned that the U.K.’s plan to conclude a trade deal with the European Union by the end of the year is “very ambitious” and not doing so could have a material impact on the country’s credit quality.

That prospect is compounded by the U.K. government’s spending pledges, which may not have been fully costed and could weigh on the country’s debt trajectory, according to Sarah Carlson, senior vice-president at Moody’s. The ratings company currently has Britain ranked as Aa2, but cut its outlook on the nation to negative in November.

“The probability of a no-deal Brexit is not zero -- it’s a non-zero per cent risk,” Carlson said in an interview on the sidelines of an event in Brussels. Failure to agree a trade deal “would be material for the U.K.’s credit quality because it’s important for things like the future trajectory of growth, given that the rest of the EU is still the U.K.’s single largest trading partner.”

The comments come amid growing signs that the Bank of England will cut interest rates this month amid slowing inflation and growth, despite an end to uncertainty over the U.K’s departure date from the EU. Prime Minister Boris Johnson has pledged to increase spending on issues like the country’s National Health Service.

Carlson said that the discussion of the trade deadline may die down over the next few months, but may well pick up again into the Summer. On Tuesday, Moody’s said that its outlook for sovereign creditworthiness in the euro area for 2020 changed to negative, from stable this time last year.

Moody’s next window to review the U.K. is on April 17, though it can also take action outside of its schedule should credit conditions worsen. Chancellor of the Exchequer Sajid Javid is set to unveil the government’s spending plans on March 11.

“There is a great deal of willingness to spend and not a whole lot of discussion on how that expenditure will be paid for,” said Carlson. It “potentially has a knock-on effect on the debt trajectory.”

--With assistance from Dirk Gojny.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Hunter, Neil Chatterjee

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