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23Jun16


Turbulence and Uncertainty for the Market After 'Brexit'


The Latest

  • Britain's exit from the European Union shocked global markets and unleashed uncertainty.

  • The pound plunged to its lowest level since 1985.

  • Investors fled risky assets and turned to the dollar and the yen.

  • The Bank of England earmarked 250 billion, about $344 billion, for potential stability measures.

In Depth

No one really knows what happens now. The collective imagination leads to dark places.

The world map has been redrawn with the rules of commerce across Europe, the largest marketplace on earth. Britain's vote on Thursday to leave the European Union has set in motion an unprecedented and unpredictable process that threatens turbulence and potential crisis — for Britain, for Europe and for the global economy.

Of most immediate consequence, Britain's vote to leave Europe sent global markets on a wild descent. Investors gaped at this major refashioning of the global landscape and decided it looked perilous — or at least so pockmarked with uncertainty that they preferred to pull their money out of riskier corners like stock markets.

Few expect that Britain's departure from Europe will set off a full financial crisis like the one seen after the collapse of the investment banking giant Lehman Brothers in 2008.

But no one knows enough to rule that out, either. The world has never been here before.

The pound plummeted by 10 percent, reaching levels not seen since 1985 — well below the value at the worst of the 2008 financial crisis. The euro dropped nearly 4 percent.

Stock markets across Asia recoiled, with the major Japanese index, the Nikkei, down nearly 8 percent. As markets opened in Europe on Friday morning, the rout accelerated. Stocks in London were instantly down nearly 16 percent, shares in Frankfurt lost 10 percent, and the exchange in Paris was off 8 percent. Investors took refuge in the safest investments, bolstering the value of British government bonds and the Japanese currency.

Less than an hour after the markets opened in London, punishing shares of banks in particular, Mark J. Carney, the governor of the Bank of England, stood in front of television cameras to announce that the central bank had earmarked 250 billion pounds, about $344 billion, to unleash as needed for stability. Markets took some solace, as they continued to pare back their losses for the day.

Whatever happens, a long, confusing period now unfolding seems certain to yank Europe back into acute anxiety just as it seemed to be finally recovering from a punishing economic downturn, one that had thrust Greece and Spain into veritable depressions while erasing years of wealth across the Continent.

The vote to leave, a so-called Brexit, raised the prospect of sustained anxiety in the global economy as investors struggle to surmise what is happening.

China, the world's second-largest economy, behind that of the United States, is slowing significantly, and the markets have little faith in the data provided by its Communist Party government. Brazil, once a darling among emerging markets, is in full-blown crisis. Europe and its common market, home to 500 million people, have been plunged into turmoil, their prospects difficult to divine.

Markets crave known facts and fret about variables, seeing potential risks in all unknowns. An enormous portion of the map is now draped in uncertainty, effectively impervious to calculation.

The vote appears likely to prompt multinational banks to shift significant numbers of jobs from Britain to competing financial centers in the European Union, led by Paris, Frankfurt, Dublin and Amsterdam. Many experts assume Brussels will move quickly to restrict trading of euro-denominated assets — a major business for Britain. Prominent banks including JPMorgan Chase and Citigroup warned during the campaign that an exit would cause them to transfer some operations elsewhere.

As investors pulled back in fear on Friday, entrusting their money only to the safest places like United States Treasuries, the moves appeared to foreshadow a tightening of credit for many. Emerging markets may find it difficult to secure investment, limiting economic growth. Borrowing costs are likely to rise in heavily indebted nations, including Greece, Italy and Portugal, as investors demand extra inducements to put their money in riskier locales.

The Bank of England may have to raise interest rates to halt a plunge in the pound, the opposite from the usual playbook when an economy suffers a shock.

Most broadly, the vote is likely to resonate as a sign that major democracies are increasingly vulnerable to the influence of populist political movements that curry favor by demonizing immigrants and external forces — officials in Brussels and Washington, low-wage workers in China and Mexico.

The noisy and acrimonious campaign over leaving the bloc played on inchoate fears in Europe and much of the developed world: dismay over globalization at a time of intensified competition for jobs, and angst over immigration as it refashions conceptions of national identity. These sentiments will surely find additional avenues for expression, challenging trade arrangements, reinvigorating existential questions about the shared euro currency and sowing uncertainty throughout the financial realm.

Economists and political analysts have been watching the campaign as a gauge of the potency of anti-immigrant sentiments far beyond Britain. The success of the movement to leave the bloc is likely to resonate in financial markets as cause to assume a higher probability that Donald J. Trump will be elected president of the United States, riding his pledges to bar Muslim immigrants and erect a wall along the Mexican border.

Given Mr. Trump's talk of renouncing trade agreements and renegotiating the terms of American debt, investors are likely to take rising odds of his election as impetus to limit their exposure to risk, eschewing stock markets and plowing funds into the safest forms of government debt.

The vote in Britain was "essentially against economic rationality and driven by identity concerns and unease about globalization and trade," said Nicolas Véron a senior fellow at Bruegel, an independent research institution in Brussels. "If such a vote can win in the U.K., that fosters among investors a sense of the likelihood that Trump can also win, and that will have an adverse effect on capital markets."

Not least, the vote unleashes considerable forces of uncertainty.

Though the vote changes nothing for at least two years, it kicks off what are certain to be complex and politically fraught negotiations between Britain and the 27 remaining members of the European Union over their future dealings.

Central to these talks is the future of Europe's common market, which allows goods and services to be traded freely throughout its vast territory. Given that Britain sells almost half of its exports in the common market, and given that many multinational companies have forged bases in Britain as a means of serving customers across the Continent, any impediment is likely to be expensive.

Disruption to trade was a major assumption in many academic studies released during the campaign that almost universally forecast substantial and potentially lasting damage to the British economy should Britain opt to leave Europe.

During the campaign, those supporting an exit emphasized that Britain would remain in the common market during the negotiating period. They assured voters that Britain would strike a more beneficial trade deal.

But prominent leaders — not least, Chancellor Angela Merkel of Germany — warned that a jilted European Union would be in no mood to extend Britain a rewarding deal, lest other malcontent members take encouragement to go for the exits.

If no deal is struck, the rules of the World Trade Organization could apply. They give member nations the rights to impose potentially steep tariffs on imports, raising the possibility of a tit-for-tat trade skirmish between Britain and the Continent.

In the meantime, the lack of clarity is likely to damage economic growth in Britain and beyond.

"You get a rabbit-in-the-headlights phenomenon where businesses don't want to make new decisions, or new investments, because they are uncertain about the future," said John Van Reenen, director of the Center for Economic Performance at the London School of Economics. "The immediate effect will be a lowering of investment activity, a lowering of hiring. There will an immediate slowdown of growth."

The success of the campaign to leave deals a formidable blow to an already weakened European Union and heightens the likelihood that fresh separatist movements will emerge. Scotland will all but certainly seek to separate itself from Britain after a failed referendum two years ago. In the Netherlands, France, Hungary and Italy, the success of the campaign should increase the intensity of so-called euroskeptic parties.

"For Europe, it raises the market's perception of breakup risk," said Adam S. Posen, a former member of the rate-setting committee at the Bank of England and now president of the Peterson Institute for International Economics in Washington.

If another euro crisis emerges, Europe may lack the political cohesion to address it. Further separatism could fragment the common market, bringing the demise of the six-decade-old project of European integration. Few now expect that to occur. But whatever the risks were before, Britain just increased them.

"At some point, you wonder how many blows a body can take," Mr. Van Reenen said. "I don't think this will happen, but there's this risk that everything will fall apart."

[Source: By Peter S. Goodman, International New York Times, 23Jun16]

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small logoThis document has been published on 27Jun16 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.