S&P says would reassess UK credit rating on 'Brexit'

By Jamie McGeever LONDON (Reuters) - The risk Britain will quit the European Union appears to be rising, which would be negative for the economy and might force Standard & Poor's to "reassess" its top-grade credit rating, the ratings agency said on Wednesday. Moritz Kraemer, S&P's head of sovereign ratings, also told Reuters that Russia's economy could slip into recession next year and its foreign exchange reserves erode further as lower oil prices and Western sanctions bite. He said in an interview that a Russian recession was not his central scenario, but is a "significant possibility". In the euro zone, weak growth and the threat of deflation will make 2015 an extremely tough year and put at risk governments' ability to ease their large debt burdens, he said. Riding a wave of Euroscepticism in Britain, the anti-EU UK Independence Party has recently won two parliamentary seats, while the ruling Conservatives have promised a referendum on EU membership within two years if they win an election in May. The risk of "Brexit" appears to be building, Kraemer said, describing any referendum as "quite a significant" step that would endanger Britain's status as one of the most attractive destinations for global investment. "We would have to reassess the way we look at the UK credit. We think that membership of the EU is very beneficial for the UK, and leaving ... would raise many questions about the economic trajectory of the UK," he added. S&P is the only major credit rating agency that still assigns Britain its top grade, having changed the outlook to stable from negative in June. It warned then that leaving the EU would weaken prospects for the UK economy, one of the developed world's fastest-growing this year. RISKS FOR RUSSIA Russia meanwhile must find a way to fill the hole blown in its budget by this year's 30 percent fall in oil prices and prevent capital leaving the country as sanctions imposed over Moscow's role in Ukraine's crisis weigh on growth. The foreign debt payments of Russian companies due next year are estimated to be well above $100 billion (63 billion pounds), Kraemer said. But many firms will struggle to secure funding, potentially triggering defaults or requiring government assistance. That could accelerate the decline in Moscow's foreign exchange reserves, now around $420 billion but which Kraemer said could be closer to $300 billion than $400 billion in a year's time. "Those reserves might be falling pretty quickly. If that perception takes hold, more and more nationals -- companies as well as individuals -- would try to move their money out of roubles into dollars," Kraemer said. Finance minister Anton Siluanov said this week that cheaper oil and sanctions are costing Russia up to $140 billion a year. One cushion is the rouble's free-floating, flexible exchange rate, which Moscow finally introduced earlier this month. "But it doesn't add up to a strategy," Kraemer said. S&P currently rates Russia BBB-, one notch above "junk" status, with a negative outlook, meaning it sees a one-in-three chance of a downgrade within two years. Kraemer said the euro zone's growth prospects next year remain challenging as consumers and businesses continue to reduce their debt loads and governments rein in spending while unemployment remains high and productivity is falling. All of this is taking place against a backdrop of low inflation, or outright deflation in some countries, making it difficult for governments to reduce their debt loads. "Where's growth going to come from? The sources of growth are quite unclear to us," he said. (Editing by Catherine Evans)