There’s a significant error here in the basic economics being assumed. If you prefer, a problem with the essential knowledge of the subject under discussion, the financial markets.
The supposition is that if Britain doesn’t cough up the £39 billion to the European Union then the country’s credit rating will be damaged.Which is to misunderstand who creates such ratings and how. There is no official body that does this to some set of strict rules. It’s a market process – thus the credit rating will be what the market thinks not paying the EU bill means:
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Boris Johnson’s threat to withhold payment of the UK’s £39 billion Brexit divorce bill until the EU gives Britain better exit terms has been the source of much debate over whether or not it constitutes a sovereign debt default. Technically, the UK would argue that this is not a debt, as normally described when referring to sovereign defaults. Nevertheless, if the EU did consider it such a default, then the consequences would be very clear. They could include a hit to the UK’s credit rating, its scope for future borrowing at reasonable rates, and access to international markets. [/perfectpullquote]So, who will lend money to the UK government is determined by the people with the money. There is no over riding authority which determines matters. There is, of course, that credit rating. AA or whatever it is at present. And the usual rule of thumb is that we take the balance of what Fitch, S&P and Moody’s are saying. Two out of three is the rating.
But’s who’s the we? Only those who are constrained by some rule – often enough what they promised when they set up an investment fund – about what they’ll allow themselves to invest in.
OK, but what are Fitch etc doing? They’re not working to a strict rulebook either. Sure, they use formulae and all that, but it’s a view, no more. They’re actually very specific, it’s an opinion. It’s an opinion on the likelihood of being paid back. Further, no one pays them to do this. Sovereign – ie country – bond ratings aren’t paid for by anyone. Not by the issuers, investors, no one. They’re advertising, PR, for the ratings agencies.
So not only aren’t there any strict rules, there’s no contract nor even a customer to enforce those rules that don’t exist.
The whole thing becomes then – “Do we think that not paying £39 billion to the EU reduces the likelihood of the UK repaying its sovereign debt?” And that’s it, that’s the only question.
Sure, the answer about Brexit could go either way, but stiffing the EU on that divorce bill? Or, as it actually is, a bit of negotiation about the accruals due in the severance?
Not going to make the slightest bit of difference to the credit rating, is it?
Depends if you have the jellyfish backbone of Mrs May who would have panicked and paid more when asked by Brussels.
The correct answer of course is to tell them to spin on it.
Anyone who’s worked as a credit analyst knows this. It’s only Remoaner ignoramuses that claim it. The real issue for the UK’s credit rating will be whether we make a success of Brexit. Which generally means doing the opposite of what May has been doing, eg not turning down a trade deal with the US…