The appointment of Boris Johnson as the new prime minister of the United Kingdom has escalated the risk of the UK crashing out of the European Union without a deal – a move analysts warn could have significant negative credit effects for the UK sovereign and related issuers.
Johnson, who was elected as Conservative Party leader on Tuesday (23 July) and took over from Theresa May yesterday (24 July), was a key figurehead in the ‘Vote Leave’ campaign of the Brexit referendum in 2016. He has made clear his preference to leave the EU by 31 October, regardless of whether a revised withdrawal deal is in place.
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“While Johnson has said that he wishes to negotiate an agreed exit with the EU by that date [by 31 October], he has signalled that he would be prepared for the UK to leave the EU without a deal if it is not possible to agree on one by the end of October. Our view remains that a no-deal Brexit would have significant negative credit effects for the UK sovereign and related issuers,” say analysts at Moody’s Investors Service.
Any Brexit compromise now seems less likely, they say; while a no-deal has increased in probability, although it lacks majority support in parliament.
The base case expectation has until now been that a deal for the UK to leave the EU would be agreed, preserving many of the features of current trading arrangements, particularly for goods.
But parliament has already voted three times against (parts of) the Withdrawal Agreement and Political Declaration agreed between the UK and the EU under former prime minister Theresa May. “It now looks unlikely that it could garner support in its current form,” Moody’s says, adding that no alternative option has been tabled.
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By GlobalDataUnder the European Council’s 11 April decision, the UK has until 31 October to completely ratify the agreement or (in the absence of another deadline extension) it will leave the EU without a deal.
The new prime minister has very limited time to agree on a compromise – if one is found – before 31 October. Moody’s analysts point out that the UK parliament will be in recess from 25 July to 1 September, leaving just two months before the exit date. Party conferences will also be held in September, further reducing parliamentary time.
Thomas Brereton, retail analyst for GlobalData, concurs, noting numerous retailers – particularly supermarkets – have expressed concerns over an October deadline, anxious about the potential increased pressure on supply chains and storage space coinciding with Halloween and preparation for the busy Christmas period.
“Boris’s appointment has seen the probability of a no-deal Brexit rise to c.25-30%,” he notes, adding the new prime minister must now make swift progress in bringing a withdrawal agreement to the table to allay retailer’s concerns.
Moody’s analysts point out that the three ultimate outcomes for Brexit that have been on the table since 2016 are unchanged: the UK leaves the EU with a deal; the UK leaves the EU without a deal; or the UK does not leave the EU.
“Nevertheless, the prolonged period of uncertainty…holds back long-term investment, business expansion and hiring decisions.”
On top of this, regardless of whether a deal or no-deal Brexit is delivered by 31 October, it is likely that Brexit will continue to dominate UK politics for some time. “If the UK leaves the EU, those wishing to remain are likely to shift to campaign to rejoin the EU. If the UK remains in the EU, those wishing to leave will continue to agitate for Brexit. As such, this issue will continue to frame other policy debates for years to come.”
