Britain’s impending exit from the European Union (EU) as well as the potential breakaway of Scotland would be “a bad scenario”, according to the global head of sovereigns at Fitch Ratings.
“A fragmented U.K. is a bad scenario from a ratings perspective because it would raise the debt-to-GDP (gross domestic product) of the remaining U.K. government by somewhere around 8 to 10 percentage points of GDP,” warned James McCormack, speaking to CNBC on Wednesday from the IIF G20 summit in Frankfurt.
“Last time there was a referendum we talked a lot about this, said there were potential negative ratings implications, the same would be true this time,” added McCormack, the executive with chief responsibility for countries’ debt ratings.
The Fitch executive highlighted that following the triggering of Article 50 to initiate the Brexit process – widely signaled to happen before the end of this month – all parties involved will be facing “the great unknown” in terms of how the decoupling of the U.K. from the trading bloc plays out.
“I think from the U.K.’s perspective they want to get as many things started as possible. From the European perspective, they want to go nice and slow and do things in the proper order,” he opined.
This week’s confirmation that Scotland’s First Minister, Nicola Sturgeon, would seek to hold another referendum before the spring of 2019 asking her compatriots whether they would like to split off from the rest of the U.K., simply added a further twist to the complicated path ahead for the U.K. government, McCormack said.
While a lack of clarity over when exactly such a vote would be held was additionally unhelpful, the reality is that it would be difficult for the U.K. government no matter what the timing.
“A lot of political capital is going to be required on both fronts,” he added.
Addressing the debt situation in the U.S., McCormack painted a mixed picture.
“There’s really no denying the short-term growth impulse looks pretty positive. People are enthusiastic about regulatory reform and tax reform even though we don’t have a lot of details,” he began before cautioning on certain other proposals made by the current administration.
“The trade reforms may be positive for growth, maybe not, certainly not in the longer term we don’t think,” McCormack posited.
Nonetheless, although the Fitch team does expect U.S. debt balance to rise even without the implementation of any proposed changes and, indeed, more quickly with them, they are reasonably sanguine on the implications for U.S. ratings.
“It’s not necessarily a rating issue because the U.S.’s AAA [rating] is supported by a number of very fundamental strengths: the role of the dollar, the US capital markets etc,” McCormack outlined.
“So it’s still in our view still a relatively strong AAA credit but some of these policies could lead to debt-to-GDP accelerating faster than we expect,” he concluded.
Fragmented UK would be bad for debt ratings, says Fitch – CNBC