S&P has cut its long-term foreign and local sovereign credit ratings for both islands by one notch from their highest possible level of “AA+” to “AA”.
“The downgrade reflects our view that increasing regulatory complexity and demands, amid the G10’s rising focus on low-tax regimes, will put pressure on [Jersey & Guernsey’s ] small financial services economy and low-tax regime,” S&P said when it made the move at the end of last week. It used the same wording for both announcements.
This move mirrored a downgrade by the same ratings agency on the Isle of Man in February 2014, which it made as it withdrew the rating at the Manx government’s request.
Announcing the more recent move for Jersey and Guernsey it said: “We consider that the regulatory challenges [the UK crown dependencies face], to adapt and coordinate key economic policies with the UK, among others, are on the rise.”
Jersey headlined its response to the ratings announcement “Standard & Poor’s rating change reflects Brexit uncertainty”.
It went on to state: “The agency confirms this is not reflective of Jersey’s current position but is based on potential future uncertainties, such as the UK EU Referendum and increased regulatory demands.”
While Guernsey’s treasury and resources minister, deputy Gavin St Pier issued a statement saying, “it is understood that a major underlying factor for the rating being lowered and the negative outlook is the potential for a UK exit from the European Union”.
To be fair, S&P did say that the next move in the ratings for both islands was likely to be a further cut “reflecting further downside risks facing [Jersey & Guernsey’s] economy and its external position should Britain choose to leave the EU in a referendum.”
But this was not a reason it gave for the ratings downgrade.
“In our view, the rating could also come under pressure if the government’s net asset position were to decline dramatically because of an increase in debt and/or a substantial decrease in its assets,” S&P also said in both announcments.
Guernsey’s St Pier believes the change of rating reflects a revision in the way S&P analyses and rates micro-sovereigns; such as Guernsey or Jersey, in comparison to larger states.
“[The ratings change] misunderstands the nature of the relationship between Guernsey and the EU,” St Pier said. “Standard & Poor’s appears not to have recognised the important point that Guernsey is outside the EU for most purposes and already has an established third county relationship on financial services.”