The continued deadlock in the negotiations on the United Kingdom's departure from the European Union suggests that the current significant uncertainty around Brexit will last longer than anticipated and highlights the downside risks associated with a 'no deal' Brexit, according to a new report.
In a note to its clients, ratings agency Moody's said the failure of the UK and EU to agree on the terms of a backstop, which would aim to preclude controls at the UK-Irish border regardless of their final future relationship, "decreases the likelihood" that the two sides will finalise the withdrawal agreement by October 2018 as planned.
Previously, uncertainty over Brexit appeared to be ebbing, after the UK and EU agreed, in principle, to a transition period until end-2020, back in March
Colin Ellis, Managing Director at Moody's and co-author of the report opined: "While the UK and EU could find a solution in the coming months, there is now less time remaining to avert a 'no deal' Brexit where the UK leaves the EU next March without a fallback arrangement in place.
"It remains in the shared interests of both parties to avert the potential fallout that could arise from a 'no deal' scenario which could have substantial negative consequences for the UK economy and weigh on the credit quality of a range of UK issuers."
For now, Moody's believes that the EU and the UK will conclude the agreement on the transition and eventually agree on a final future relationship framework that has features similar to those of current trading and regulatory arrangements, particularly for trading in goods, while financial institutions will to lose their "passporting" rights after the transition ends. This view underpins Moody's assessment that Brexit will have a moderate and manageable impact for most UK issuers.
