According to Moody’s
The agreement between the European Union and the UK on the terms of a transition arrangement reduces the risk of a “cliff-edge” Brexit in March next year, which could have a substantially negative impact on UK growth yet remains conditional on final conclusion of the withdrawal, Moody’s Investors Service said in a report today.
“Greater clarity on the post-Brexit transition arrangements is credit positive for a broad range of UK issuers as continued access to the EU internal market until end-2020 would extend the narrow timeframe available to shape and implement a new trade arrangement and regulatory regimes,” said Colin Ellis, Moody’s Managing Director — Credit Strategy and the report’s co-author. “It also buys the UK limited time to negotiate free trade agreements with other countries.”
The agreement remains conditional on the EU and the UK resolving differences in other areas of the withdrawal, in particular finding a solution that prevents a hard border between Ireland and Northern Ireland, as well as legal enforcement mechanisms.
Without the withdrawal agreement being concluded and ratified by all EU-28 national parliaments, the UK will become a ‘third country’ in its trading relationships with EU member states upon its exit. This could have substantial negative consequences for its economy and weigh on the credit quality of UK issuers.
The European Council also agreed its negotiating guidelines that would seem to support the UK’s chances of securing a free-trade agreement (FTA) after the transition ends which retains many features of current trading and regulatory arrangements, particularly in the trade of goods.
The agreement reinforces Moody’s view that the impact of Brexit will be manageable for rated UK corporate issuers, despite increased bureaucracy costs under an FTA. The final impact on corporates would also depend on their ability to successfully execute their plans, although full mitigation is unlikely.
For UK banks the agreement is mildly positive to the extent that it reduces downside risks to growth and revenues. While banks may have more time now to implement contingency plans, Moody’s expects most will adhere to their current timelines for implementing necessary changes, given the uncertainties that still remain.
As far as the risk of a disorderly withdrawal is somewhat mitigated, the agreement reinforces Moody’s central scenario of gradually moderating growth in the UK, under which remaining asset-backed securities (ABS) and residential-mortgage backed transactions (RMBS) are unlikely to experience significant performance deterioration. However, any decline in consumer confidence from ongoing uncertainty regarding the future relationship will weigh on housing sales, increase saving rates and reduce borrowing.
Uncertainty concerning the terms of UK’s future long-term relationship with the EU will prevail until a conclusive final agreement is reached, which will continue to curtail the operating environment of UK issuers and hamper corporate investment.