UK Faces ‘Substantial’ Risk of Failure of Brexit Talks, Moody’s Warns

The risk that the UK will tumble out of the European Union in two years without a Brexit deal is “substantial,” Moody’s Investors Service said.

Such an outcome would affect everything from banks to buses and could result in a recession, the ratings company said in a report published in London Tuesday.

“We still think that the EU and the U.K will eventually come to an agreement that captures many — but not all — of their current trade arrangements,” said Colin Ellis, Moody’s managing director for credit strategy. “But the probability that negotiations will fail and no agreement will be reached is substantial.”

While a slowdown in the economy could have a negative impact on UK bus and rail operators, a so-called cliff-edge Brexit would weigh particularly heavily on the aviation industry, the report found. Ryanair Holdings Plc Chief Executive Officer Michael O’Leary told members of the European Parliament last week that the airline would stop flights to the UK if it didn’t have a clear legal framework by September 2018.

And shoppers may also suffer. The report found that few companies have undertaken detailed planning for a “no deal” outcome, which would hit smaller firms especially hard. Food imports would be more at risk under this scenario than clothing and consumer goods, Moody’s said.

In good news for finance, Moody’s found that the impact of a “no deal” scenario on the industry would be muted. Passporting, allowing UK-based firms to offer services across the EU, is “highly unlikely to persist,” but “the incremental costs that banks will incur in order to mitigate the loss of revenues will be moderate and manageable.”

In terms of the economy, “no deal” could see growth slowing and even an outright recession. These factors, along with higher unemployment and inflation, would weigh on credit quality. Restrictions on immigration could exacerbate skills shortages, while the pound would be likely to fall sharply, Moody’s said.