In a quick and dirty roundup of available, online predictions and opinions, it’s clear that if the U.K. votes to leave the E.U. there will be dire consequences.
(Editor’s note: As the U.K. votes today on whether or not to stay with the E.U., FTF News decided to pull together some predictions and reactions from this side of the pond. All of the quoted material is available online for further investigation.)
SIFMA Roundtable Predicts U.K. to Stay
In a statement dated June 14, securities industry advocate SIFMA via its Economic Advisory Roundtable made many forecasts about the U.S. economy, in particular that it will grow 1.8 percent this year, “strengthening to 2.3 percent in 2017.”
The roundtable also took on the U.S. presidential election and Brexit:
“A slim majority of respondents agreed that the upcoming presidential election would impact GDP growth, largely through the suppression of both consumer and business spending due to uncertainty,” according to the SIFMA press release at http://bit.ly/28NdAiT
“When asked about the upcoming June United Kingdom vote on the potential exit from the European Union in June (“Brexit”), respondents unanimously expected the UK to stay in the EU. When asked about the potential impact of a UK exit, respondents were unconcerned.”
Yellen and the Brookings Institute Express Fears over Brexit
A woman known to choose her words carefully, Janet L. Yellen, the chair of the Board of Governors of the Federal Reserve System, did let slip at the World Affairs Council of Philadelphia on June 6, some of what she thinks of Brexit.
“More generally, in the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly,” Yellen said. “One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions.”
What some of those repercussions are were spelled out by Aaron Klein and D.J. Nordquist at the Brookings Institution, a nonprofit public policy organization based in Washington, D.C. Klein is a fellow and Nordquist chief of staff in Economic Studies at the Brookings Institution.
Here are some highlights from their opinion piece, dated June 15, “Is Brexit good for America? Nope”:
- “The U.K. leaving the European Union would mean substantial upheaval for global markets, financial firms, and businesses that would likely leave London. Markets like certainty, and they do not want nor expect this kind of change. Already, markets are nervous, U.S. and global stocks are slumping, and money is pouring into safe haven sovereign debt: the yield on the 10-year U.S. Treasury note is approaching record lows, while Germany’s 10-year note broke a new record low — a negative yield! Investors in Europe are so skittish they are willing to pay money, over a decade, just to hold German debt.”
- “Yet some may believe that a Brexit would advantage the U.S. in the short-run — specifically a flight to safety reducing interest rates and potentially increasing American competitiveness in financial services compared to London, as London is Europe’s financial hub. In the short-term, it is possible that some sectors in the U.S. would gain, particularly in finance with New York and Wall Street gaining an event firmer foothold against London as the global financial capital.”
- “Brexit would lead to a global fall in equity prices as investors fear the impact the vote could have on Britain’s economy, and could spell the first falling domino of European Union disintegration. Keep in mind the vote for Brexit would only be the first step for the United Kingdom’s actual departure the European Union. Terms of the departure would have to be mutually agreed to and those terms would set substantial precedent for other nations that chose to leave; the EU may try to punish the UK for its departure.” Here’s a link to their posting: http://brook.gs/28NpXeG
Research Head at FIS/SunGard Presents Two Key Scenarios
At FIS/SunGard, Dr. Laurence Wormald, head of research and quants and APT, released online a scenario analysis, and the following highlights from the brief note at http://bit.ly/28S9utG are based on two Brexit scenarios:
- “One in which a leave vote does not fundamentally change the political balance within Europe, and another (which we call ‘exit contagion’) in which a U.K. leave vote leads quickly to calls from powerful anti-EU parties across Europe for a process of re-negotiation with the EU under the threat of referenda, similar to that followed by the U.K. Other anti-EU parties may not be the governing parties at present, but they can claim sufficient popular support to destabilize their domestic politics in ways that will upset the markets.”
- “The estimates suggest that asset managers should be paying very close attention to the significant risks associated with the U.K. referendum, and should be considering a variety of diversification and hedging strategies if their mandates permit them.”
- “Many of the studies of the economic effects of the U.K. leaving the EU have a time horizon of many years, and focus on prospects for GDP growth, productivity, inflation and the trade balance rather than the way in which these changed expectations will affect securities markets in the short term around the time of the referendum itself. … Market risk managers need to create scenarios over these shorter time frames, and users of the APT risk management system tell us that the most useful time period for their purpose is ‘weeks to months’ after the event day.”
- “Among the sources we have consulted (see selected references below) only a few have taken this shorter-term view, notably the Bank of England, the ECB, Fitch Ratings, and the Blackrock Investment Institute. Fitch has stated that “The inherent uncertainty about the implications of a leave vote may add to financial market volatility and result in a sterling depreciation”.
- Blackrock has concluded that “We see volatility in U.K. and European assets rising ahead of the referendum […] An actual Brexit would hit global risk assets, we believe, whereas a vote to stay would reassure markets. Sterling is most vulnerable to Brexit fears as it is the most liquid U.K. financial asset”. The Blackrock report also states “A leave vote would likely increase gilt yields. Portfolio inflows could falter, pressuring domestic sources of funding for the budget deficit. We could see bank funding costs rise and credit spreads widen.”
- “The Bank of England (BoE) would likely cut rates in such a scenario or revive quantitative easing, looking past any temporary rise in inflation caused by a weaker currency, we believe”.
- “We have also considered a potential scenario (which we have called “exit contagion”) in which a Leave vote in the U.K. encourages other anti-EU parties in Europe (such as the Freedom Party in Austria, the Law and Justice party in Poland, or the Front National in France) to agitate more forcefully for re-negotiation or exit referenda in their countries. Political shocks are by their nature very difficult to forecast, so the uncertainty around the exit contagion shock estimates is even greater than that associated with simple Brexit.”
