The S&P Global Rating has announced European Union credit rating will no longer be the AA+ it has been for decades but AA. This comes after a reassessment of the credit ratings by the agency following the announcement by U.K to withdraw from the EU.
According to the agency, the move by U.K to leave the EU will cut not only the “supranational” fiscal flexibility of the union but also political cohesion within it.
“Going forward, revenue estimation, long-term financial-planning and adjustments to important economic safeguards of the EU will be subject to greater insecurity,” wrote the global agency in a statement.
The financial market intelligence provider also downplayed the previous credit rating saying it was a reflection of a ‘baseline scenario’ that was only maintained on the assumption that all 28 members states would stick to EU.
This comes a week after both the S&P and Fitch had downgraded U.K’s credit ratings pointing to the popular initiative that approved British exit from the EU.
S&P had lowered the country’s credit ratings from AAA to AA while Fitch reduced it from AA+ to AA.
Despite the fall, S&P maintains the economy is stable as a short-term ‘A- 1+ rating was asserted.
Meanwhile, while the members left are expected to guarantee their commitment to EU, the exit by UK is expected to make a difficult case negotiating the budgetary outline that will run for the years 2012-2027.
The Union’s long-term credit rating principally relies on the ability and preparedness of the 10 richest EU members that are also the net contributors to the Union’s budget including the UK.
The baseline rating is conventionally calculated by determining the GDP-weighted rating of the net contributors, which now stands at ‘AA’ and then it is modified up or down according to the regular assessment results by S&P.
About the fall, economists are now warning of more consequences of UK withdrawing from the EU with HIS Global Insight cutting its growth estimates from 2 percent to 1.5 percent for 2016 and from 2.4 percent to 0.2 percent for the following year.
Earlier today (on Thursday), Bank of England governor Mark Carney indicated the likelihood of lowering interest rates over the summer to help lift the economy.
“Some fiscal policy easing would be required in response to the Brexit vote,” said the governor in a statement to the press.