October 29, 2015 / 4:50 PM / 2 years ago

Britain may face two-notch rating cut if it leaves EU - S&P

An employee at the European Commission adjusts a British flag ahead of the meeting between British Prime Minister David Cameron and European Commission President Jean-Claude Juncker in Brussels, October 15, 2015.Yves Herman

LONDON (Reuters) - Britain's credit rating could be cut by as much as two notches if it leaves the European Union, Standard & Poor's told Reuters on Thursday.

A vote to quit the EU would be likely to result in a one-notch downgrade, which could be increased to two notches if relations between London and Brussels deteriorated significantly, the credit ratings agency's chief European sovereign rating officer told Reuters in an interview.

Support among Britons for staying within the bloc has tumbled as an influx of migrants into Europe has pushed many voters toward opting for an exit ahead of a referendum due by the end of 2017.

S&P has rated Britain at AAA since 1978, but revised the outlook to negative in June, citing the risk of a so-called Brexit.

S&P's Moritz Kraemer told Reuters that Britain would face a one-notch downgrade if it voted to leave, and possibly double that if relations between London and Brussels sour or that vote prompted secession by Scotland from the United Kingdom.

"Should we conclude that departure from the EU is likely over the medium term, we could lower the rating by potentially more than one notch, depending on the circumstances, such as the expected future relations with the EU," Kraemer said.

A poll earlier this month showed support for a British exit at 39 percent, up from 27 percent in June and the highest level since 2012.

Whether Scotland remains part of the United Kingdom after Brexit would also be a factor. The Scottish government has said Brexit could trigger another vote on independence following a referendum north of the border on that issue last year.

"It is one thing to leave the EU, but if the country gets divvied up further, then that is another layer of complication and problems," he said.

The tensions in the UK over the hundreds of thousands of refugees currently pouring into Europe, was "very valuable to the 'No' camp," Kraemer said.

"The refugee crisis overall has the potential of making Brexit more likely," he said.

But Kraemer added there were far wider implications of the migrant flood, with signs it was beginning to alter the political dynamic within the EU.

The Iron Curtain-era feel of fences being erected along borders is creating ill feeling between governments and increasingly within national parliaments, including Berlin, all of which is raising questions about Europe's togetherness.

"If this cannot be resolved, and it appears that there is not much of a prospect that this will be resolved in a coherent way right now, it will embitter the relations in Europe and make it harder going forward to respond to financial crises."

Kraemer said the current handling of the situation had echoes of late 2011, when the euro zone was fumbling over its debt troubles. That saw S&P put 15 of the bloc's then 17 countries on review for a downgrade, although the relatively small costs at stake now means there would not be a repeat.

"What is different now is that with the refugee crisis you can't kick the can down the road because these people are actually standing there and winter is around the corner."

Reporting by John Geddie, Marc Jones and Jamie McGeever; editing by Nigel Stephenson, John Stonestreet and G Crosse

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