Central banks expectants before the results of “Brexit” in the UK

Central banks expectants before the results of “Brexit” in the UK

16/06/2016 source “Expansión”

The world’s central banks remain expectant before the close of the voting date in the UK to leave the European Union – “Brexit, as is commonly known – and some are preparing for possible instability of the financial market.

Analysts from other banks continue to predict that the British will vote to remain in the EU, while the polls give the advantage to “Brexit”. According to analysts, if on 23 June, the UK will vote in favour of “Brexit”, it will affect the exchange rates, sovereign debt and the differential with the German debt in ten years, used as a reference.

The greatest fear of the referendum is possible the country’s foreign exodus, which would stop the Exchange markets and would affect growth if companies do not get access to foreign capital they need to negotiate daily.

A report of Bobby Vedral, strategy director in the area of currencies of Goldman Sachs, launches panic over the “Brexit”.

Given this possible storm, “central banks (primarily the Bank of England, but also others) will be prepared to animate the [market] situation, with a likely support to the bonds of the Government and perhaps to the corporate bonds”.

This will make, according to Bobby Vedral, that “the focus of the correction is produced in assets that will not be supported [be central banks] – mainly stock exchange and foreign currency, causing a strengthening of the Yen and the Swiss Franc, and the weakness of the Pound and probably the Euro -, and also in emerging markets. The first reaction will probably focus on the sale of British assets, but soon will be clear that this is an European problem”.

The seek for refuge in the United States before the possible “Brexit” was already observed in the market, with the profitability of American bonds getting down at the same rhythm of the pound, referred yesterday another report of Société Générale. It also explains the recent plummeting of the profitability of German bonds.

Among the initiatives to alleviate the situation, are being handle liquidity provision arrangements (swap lines) that will allow the exchange of currencies, as between the Bank of England and the European Central Bank (ECB), as with other central bodies. Through the so-called swap lines, a central bank can access a currency of an institution abroad at the current exchange rate, but these transactions raise interest rates.

Given the uncertainty over the “Brexit”, ECB officials reported that the entity publicly commit to support the financial markets, in coordination with the Bank of England.

The chief economist of Deutsche Bank in Germany, Stefan Schneider, said that the ECB has no interest in worse the market conditions and nor the financing, which are essential for its monetary policy. He added that one of the tasks of a central bank is to ensure the stability of the Foreign Exchange market when it is in danger.

On the other hand, analysts of the United States bank in London say it is “highly likely” that the United Kingdom vote for leaving the EU, and anticipate a “global” storm in the markets.

The most worrisome for Bobby Vedral and his Goldman Sachs team is that although the “Brexit” is a known risk, the market is not prepared. According to the latest survey among managers of Merrill Lynch funds, 30% see the “Brexit as the greatest global risk, but only 5% believe it will happen. This makes, according to Goldman Sachs, that the victory of “Brexit” is a real surprise that require a sharp adjustment of portfolios and movements in the market”. According to the report, will be produced a global flight from risk assets, with a sharp correction in stock markets and in Libra, which will extend throughout Europe.

Interestingly, in the medium term, the analysts of Goldman Sachs indicate that while gaining supporters of EU leave, that could not result in a real “Brexit”. “Another possible scenario is that this vote will trigger a new European treaty that reflects the new political reality of concentric circles moving at different speeds rather than searching all the same goal.”