UK credit ratings cut: S&P and Fitch downgrade post-Brexit vote

S&P cuts UK credit rating

Standard & Poor's and Fitch on Monday downgraded the United Kingdom's credit rating.

S&P downgraded the nation by two notches, from "AAA" to "AA," citing last week's referendum that approved a British exit from the European Union. Fitch, meanwhile, moved its rating from "AA+" to "AA."

"In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.'s institutional assessment and now no longer consider it a strength in our assessment of the rating," the ratings agency said in a news release.

Fitch, meanwhile, said that "uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment." The agency said it had revised down its forecast for the U.K.'s 2016 real GDP growth to 1.6 percent from 1.9 percent.

Fitch's 2017 and 2018 GDP forecasts were also both revised to 0.9 percent growth from 2 percent.

S&P expressed concern that wide-margin votes to remain within the EU from Scotland and Northern Ireland create "wider constitutional issues for the country as a whole." The ratings agency said its downgrade notes the risk of a "marked deterioration of external financing conditions in light of the U.K.'s extremely elevated level of gross external financing requirements."

Fitch also cited the possibility of Scottish independence, noting that such a vote "would be negative for the U.K.'s rating, as it would lead to a rise in the ratio of government debt/GDP, increase the size of the U.K.'s external balance sheet and potentially generate uncertainty in the banking system, for example in the event of uncertainty over Scotland's currency arrangement."

Brexit & the generational split

S&P and Fitch also both warned that future events could result in further downgrades.

"The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence," S&P said.

The United Kingdom voted on Thursday by a margin of more than 1 million people to leave the political and economic union — an event that has been regularly called Brexit. Equities markets saw significant losses as news of the vote spread, and currencies swung wildly.

Much remains to be seen about what the exit will look like — or even if it will actually occur.

Yet that uncertainty is at the very core of markets' concerns. As EU leadership and British representatives negotiate the terms of their break-up, the ambiguity will likely freeze some investment and could lead to economic recession, some economists have argued.

That's all not to mention that the U.K. may have a leadership crisis now that Prime Minister David Cameron has announced he will step down by October.

Even beyond those immediate considerations, the U.K.'s economic prospects could be damaged by more expensive "terms for exports to the EU, lower immigration and a reduction in foreign direct investment," according to Fitch.

CORRECTION: An earlier headline misidentified the U.K.'s previous rating from Fitch.