Leaving EU risks large City bill

Britain leaving the EU would do much harm to the City of London and inflict serious damage to the country’s prosperity, Standard & Poor’s has warned.

S&P is the latest rating agency to warn about the consequences if UK prime minister David Cameron fails to carry his in-out referendum on Britain’s continuing participation in Europe, which he has pledged to hold before the end of 2017.

A vote to leave the EU could cut the UK’s credit rating, rival ratings agency Moody’s warned this month.

In its report, ‘Brexit Risk for the UK and its Financial Services’, S&P is the first to specifically warn about the consequences on Britain’s huge earnings from its financial services industry based in the City of London if the UK electorate were to vote to turn their backs on the EU.

“We believe it could significantly dent the UK’s current net trade surplus in insurance and financial services of more than 3% of GDP,” said S&P credit analyst Frank Gill.

S&P estimates that the ‘Brexit’ bill could be substantial because Britain relies so much on the City for its prosperity — 30% of the UK’s inward foreign direct investment, equivalent to 17% of its GDP, is sourced from financial services. And almost half of those foreign financial investments flow in from the EU, it says.

However, S&P concedes that estimating the overall costs is difficult because Britain could strike favourable trade terms with the diminished EU. Nonetheless, the City of London could suffer in the longer term.

“While we think London would maintain its status as a global financial centre in the event of a Brexit, global banks could ultimately consider other locations as bases for their European operations,” said Mr Gill.