Moody’s eyes ‘softer’ Brexit following UK election

Moody’s, one of the world’s leading credit ratings agencies, said the UK’s inconclusive election outcome last week increases the likelihood of a “softer” form of Brexit.

However, the value of sterling weakened on Monday as the ratings firm also warned that the result “will complicate and probably delay Brexit negotiations” which are currently scheduled to be begin next Monday, while the emphasis on reigning in the UK’s budget deficit is expected to be given a lower priority by the next government.

Both of these are viewed by Moody’s as “credit negative”, meaning it could have an impact of the agency’s Aa1 rating on the world’s fifth largest economy. By the time European markets closed on Monday, sterling had weakened by 2.3 per cent against the dollar in the two sessions following the UK election.

On the postive side, Moody's analysts led by Kathrin Muehlbronner, said: "While we still expect Brexit to happen and the 'cliff' risk of a sudden exit remains, the election result suggests an electoral shift away from the 'hard' Brexit that the prime minister had ostensibly sought."

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Supporting Brexit

A move “towards ‘softer’ versions of Brexit”, including a request to remain inside the EU Single Market or customs union may be on the cards, according to Moody’s.

After failing to regain a majority in the House of Commons in last Thursday's election, UK prime minister Theresa May has been forced to turn to the Democratic Unionist Party (DUP) to seek a deal to prop up a government.

The DUP, while it was alone among the main Northern Ireland parties in supporting Brexit in a referendum last year, want to prioritise maintaining a Common Travel Area between the UK and the Republic, a frictionless border with the North as well as a free trade and customs agreement with the EU.

“While the economic impact of such an outcome would be significantly less severe than the ‘hard’ Brexit pursued so far, it is still far from clear whether these are indeed realistic scenarios,” said Moody’s.

“The time frame for the UK’s withdrawal from the EU in March 2019 remains unchanged, reducing still further the time available to achieve the transition agreement needed to avoid a ’hard’ Brexit.”

Moody’s has an Aa1 rating on the UK, one level below its top-notch Aaa stance.