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UK could face more downgrades, warn credit agencies

Following the U.K.'s dual credit downgrade on Monday, with both Fitch and Standard &Poor's (S&P) slashing their ratings after the country voted to leave the European Union, the latter has warned that more downgrades could follow as financials favor other investment destinations beside the U.K.

"The rating action we took yesterday, which is a two-notch downgrade from AAA to AA, is a direct reflection of the new reality in which Britain now finds itself," S&P's sovereign ratings managing director and chief rating officer Moritz Kraemer told CNBC on Tuesday.

Acknowledging that S&P was surprised by the outcome of the Brexit vote, Kraemer told CNBC that what is "urgently required to be established in the next couple of weeks is that we get to know what Plan B is."

"The British people were asked to vote two options in which only one option was certain which was EU membership and the other one is basically uncertainty," said Kraemer.

"It is now urgent for the British authorities and new government, whoever that might be, to actually formulate a consensual view of what they want to present to Brussels as a negotiation platform."

British prime minister David Cameron, who resigned Friday after campaigning for several months for the 'Remain' side, is due to arrive in Brussels Tuesday to begin talks with EU leaders on when the U.K. will officially leave the 28-member bloc.

The Brexit vote represented "substantial shock… and is generating severe political upheaval," said Ed Parker, managing director at Fitch, to CNBC.

One of the largest credit ratings agency in the world, Fitch moved its rating of the U.K. from "AA+" to "AA."

"We expect U.K. growth to fall to 0.9 percent in 2017 and 2018 down from 2 percent in our prior base case so in the next couple of years that would leave the level of Gross Domestic Product about 2.5 percent lower than in our prior remain base case," Parker told CNBC.

"Expect the economy to be weaker. That weaker growth will feed to and have an adverse impact on tax revenues and that means that if the government is to achieve its current fiscal target then it would need to introduce additional fiscal austerity measures," he added.

Both agencies warned that future events could result in further downgrades.

"In the next year or two the rating could be downgraded again which would partly hinge on what the reaction is here. Not only in Britain but potentially in the world too because this has to be a dialogue which is very difficult, which is unprecedented – a lot of unknown and a lot of veto players so uncertainty is at a maximum," said Kraemer.

"At the moment, everything is in a state of flux," agreed Parker.

Standard & Poor's headquarters in the financial district of New York
Stan Honda | AFP | Getty Images
Standard & Poor's headquarters in the financial district of New York

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