15 June 2016

The New York Times: ‘Brexit’ Plan for the Financial World? Cross Your Fingers

Whatever stories policy-makers and businesspeople tell themselves, the only certainty after a Brexit is a surplus of uncertainty. Whatever provisional plans they sketch, they will find themselves mostly just wishing that nothing terrible happens.

Angst has seeped into the calculations. As investors digest the possibility that the largest marketplace on earth may be days away from a messy alteration, they have been yanking money out of riskier storehouses like stocks and putting it into safer instruments like bonds. The British pound and London stocks have been falling in frenzied trading.

The conversation is now focused on managing the risks of Brexit. The trouble is that the worries are so diffuse and rife with unknowns that any attack plan amounts to an exercise in guesswork and hope. Executives, bankers and bureaucrats are grappling with something that could be minor or momentous and has never happened before.

Maybe the Brexit — for British exit — would merely lop value from the pound before traders turned their attention to a more consequential plot twist elsewhere. Perhaps it would inspire separatist movements from Scotland to Spain, embolden anti-trade populists across the Continent and reinvigorate existential questions gnawing at the common euro currency. That could sow fear across world markets.

A Brexit might spook investors into entrusting their money only to the safest repositories like American Treasuries. That could strengthen the American dollar and weaken American exports, while starving riskier emerging markets of investment. [...]

If you run a central bank, water comes in the form of liquidity. Most experts assume the Bank of England and its counterparts have readied plans to lend to financial institutions that could face cash shortages. In recent days, European Central Bank officials have signaled readiness to inject money into the financial sphere. In a speech last week, the Federal Reserve chairwoman, Janet L. Yellen, warned that a Brexit could have “significant economic repercussions.” [...]

According to Laurence Wormald, head of research at FIS, which provides technology and market intelligence to financial services companies, British stocks would most likely fall 15 percent after a Brexit, with the pound dropping by a similar proportion.

If a Brexit vote hurts the British economy, the central bank might feel compelled to lower rates to motivate businesses and households to borrow and spend. But the bank might well do the opposite, raising rates to stop a currency slide.

The most nettlesome variable may be trade. Britain sells nearly half its exports within the European Union. Multinational corporations have set up headquarters in Britain, using those bases to serve customers across the Continent. [...]

But if Britain failed to secure a deal, commerce with Europe could be governed by the terms of the World Trade Organization, which gives member nations the authority to impose potentially steep tariffs on imports.

The debate over the Brexit is full of references to sundry alternative models. Norway enjoys access to the European market although it remains outside the union. Switzerland has achieved similar status through a thicket of treaties. But in both cases, they must accept something supporters of Brexit want to eliminate — European rules that allow people to move liberally from country to country. [...]

Nowhere are preparations more intense than in finance. London has parlayed expertise in banking and inclusion in Europe to secure dominance over large areas of trading. As the referendum approaches, financiers are now consumed by a jigsaw puzzle of diabolical complexity: They are mapping out what assets they hold and where, seeking to anticipate what jurisdictions and rules might apply post-Brexit. [...]

If the sun rises on June 24 with Britain on its way out, such a shift could happen sooner rather than later. At a time of crippling uncertainty, banks would feel a compulsion to at least eliminate variables by quickly announcing their plans, moving people within the European Union — to Amsterdam, Dublin, Frankfurt and Paris.

In the end, contingency plans may be devised more as salves for frayed nerves than bona fide operational blueprints. Britain may be on the verge of refashioning the world map. If that happens, the vote will set off proceedings so complex that the only guaranteed winners are the lawyers.

Full article on The New York Times

 

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