Sunday, 22 November 2015

Christmas come early



Ratings agency Moody’s has said that the UK may be able to avoid a credit downgrade if it leaves the European Union. In an interview with The Sunday Telegraph, the agency’s lead UK analyst said that it was possible that a “Brexit” may lead to “no impact” on the Aa1 rating. Kathrin Muehlbronner, senior vice president at Moody’s and the agency’s lead UK analyst, said that the UK’s “diversified and rich economy” meant it could flourish outside the bloc.

While Moody’s said the uncertainty would be negative for growth, it said this could be short-lived if the UK were able to negotiate new trade deals with major partners quickly. “Uncertainty alone may not change the rating,” said Ms Muehlbronner. “What we care about is economic strength, and it is our view that the economic impact of a Brexit would be negative.

S&P said in June there was now a one in three chance
of a downgrade of one or more notches in the event of Brexit. However, Moritz Kraemer, chief rating officer at S&P, said the UK could be upgraded back if the economy maintained its influence. “Switzerland is an AAA and they’ve never been part of the EU, and Norway is, too. There’s no pre-condition of being a part of the EU.” 

Firstly, we would note that it is a change to see some measured analysis that does not give way to the usual hyperventilation. But from this we can infer that the money men (and women) do not see the Norway Option as a risky path out of the EU.

The key quote we would emphasise is this one "Moody’s said the uncertainty would be negative for growth, it said this could be short-lived *if* the UK were able to negotiate new trade deals with major partners quickly."

We take the view that trade deals are not so easily and quickly replaced or renegotiated and so to remove that "if", a Brexit plan must be central to any campaign. A Brexit plan that offers a transitional usage of existing arrangements takes that "if" out of the equation. In this game, a successful campaign can hold them to their word in that if there is no loss of access to existing trade deals then their basis for "uncertainty" is baseless.

Given that we can rely on continuity of treaties, as long as the proper arrangements are made in good time, then there should be no great problem anyway. One would expect these arrangements to form part of any structured exit plan, which would remove any uncertainty from the equation. Part of those "proper arrangements" would be continued regulatory convergence which is not only necessary for EU market access but also a condition of most of the trade agreements we would seek.

We would therefore question the fitness of Dominic Cummings to be leading this campaign in that he is publicly attacking the single market and is steadfastly refusing to adopt any kind of Brexit plan, instead pegging his hopes on some as yet undefined free trade agreement, completely ignoring the regulatory ramifications. Madness.

An astute campaign would recognise this report for what it is. An early Christmas present. Winning the referendum hinges on de-riskng it. Here we have two major financial bodies telling us that Brexit could be greenlit by them if we can show we have the intellectual goods. We've been shown the way in big neon lights. All we have to do is exploit the opportunity yet Cummings et al are intent on introducing risk where none previously existed. Not particularly smart for a man reputed to be a genius.

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