'Brexit' would pose risks to UK growth and financial services sector, says S&P
A UK referendum vote in favour of leaving the European Union could pose a risk to growth prospects for the UK economy and its financial services sector, ratings agency Standard & Poor’s said in a report on Tuesday.
“We believe it could significantly dent the UK's current net trade surplus in insurance and financial services of more than 3% of gross domestic product," said S&P analyst Frank Gill.
However, the extent of the impact will depend on what alternative free trade arrangements the UK government could agree with its European partners, said Gill.
Financial services attract 30% of the inward foreign direct investment in the UK, which is equivalent to 17% of GDP.
“While we think London would maintain its status as a global financial centre in the event of a Brexit, global banks could ultimately consider other locations as bases for their European operations,” said Gill.
"This is because UK-domiciled banks use their UK authorisation to provide banking and trading services across the EU and European Economic Area, known as passporting rights. Without these, there’s a risk that enough major global banks could choose to route their business through other European financial centres," said Gill.
He said the impact on domestically-orientated UK banks would likely be indirect and potentially modest, although they could feel the knock-on effect on the vitality of the UK economy and the creditworthiness and activity of its actors.
For insurers, a 'Brexit' would likely entail additional costs of doing business in Europe, although S&P does not expect their operations would be significantly curtailed.
"Given that the UK operates the second-largest current account deficit in the world, to put at risk one of the few net exporting sectors via a highly politically-charged referendum would in our view pose substantial risks to the balance of payments, the currency, and the economy," said Gill.