Standard & Poor’s announced Monday that it has lowered the United Kingdom’s sovereign credit rating from “AAA” to “AA.”
S&P cited last week’s U.K. referendum to leave the European Union in its explanation of the rating decline.
“In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating,” the ratings agency said in a news release.
S&P also expressed some concern that wide-margin votes to remain within the EU from Scotland and Northern Ireland create “wider constitutional issues for the country as a whole.”
The ratings agency also said its downgrade notes the risk of a “marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.”
The long-term sovereign credit decrease from “AAA” to “AA” is a two-notch fall for the U.K., and S&P also said it holds a negative outlook going forward.
“The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence,” S&P said.
The United Kingdom voted last Thursday by a margin of more than 1 million people to leave the political and economic union — an event that has been regularly called Brexit. Equities markets saw significant losses as news of the vote spreading, and currencies swung wildly.
Much remains to be seen about what the exit will look like — or even if it will actually occur.
Yet that uncertainty is at the very core of markets’ concerns. As EU leadership and British representatives negotiate the terms of their break-up, the ambiguity will likely freeze some investment and could lead to economic recession, some economists have argued.
That’s all not to mention that the U.K. may have a leadership crisis now that Prime Minister David Cameron has announced he will step down by October.