Would leaving the EU affect businesses’ access to capital?

EU referendum jugsaw pieces

To a large extent what will happen to access to capital should Britain vote to leave the EU will be determined by the perception and subsequent behaviour of three key players: the ratings agencies, such as Moody’s; the financial institutions, such as the banks; and investors.

In March Moody’s warned that the economic costs of leaving would outweigh the benefits and may put the UK’s Aa1 credit rating at risk. The agency believes that the value of debt would be likely to reduce because of a belief that debt would be less likely to be paid although it does not believe an exit would have much effect on the credit rating of banks.

It also suggested that it was “highly unlikely” the UK’s existing arrangements with the EU in areas such as trade would be “replicated in full”.

What might be the effects on lending and investing?

Business capital illustrationThe willingness of banks to lend is also likely to be affected by a Brexit, in my view.

I would argue that foreign banks would be less likely to lend in UK, a logical consequence of what Moody’s has been suggesting.  Given that UK banks are still not generally lending to small business this combination would suggest there will be much more reliance on alternative forms of funding, and that there will less funding available.

The third key set of players is investors. While it is rational for investors to wish to protect and increase their returns, for some time now they have focused on short term gains and “safe” or asset underwritten investments which accounts for the current high values of both gold and property. The question is whether the UK leaving the EU would increase their anxiety levels and push them further into safe investments. This would make it much harder for both UK manufacturing and service sectors to get access to capital.

A final consideration is that the EU treaty would continue for two years following a vote to leave and the Government would have to trigger a particular clause, Article 50, to push ahead with disengagement. I believe that the likely consequence of this would be a rise in the cost of capital and that both lenders and investors will become more cautious, certainly until they have more confidence about the future.

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