Thursday

22nd Aug 2019

Pound plunges after UK result, but no 'panic'

  • Commerzbank: "The reaction of the markets was significant but we are not in panic mode" (Photo: stefan)

The value of the British pound plunged to a 30-year low against the US dollar after the UK voted to leave the EU, with top banks predicting more volatility but no “panic”.

“This is not such a good day for Europe”, John Cryan, the British CEO of Deutsche Bank said in a statement on Friday (24 June) morning after final results were out.

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  • Bank of England said it would "take all necessary steps to meet its responsibilities for monetary and financial stability" (Photo: Travel Aficionado)

“We cannot fully foresee the consequences, but there’s no doubt that they will be negative on all sides”, he said.

“As a Briton and a European, it especially saddens me that Europe has obviously lost its attractiveness for many of my fellow countrymen. It’s a clear signal to the EU to get closer to its people and to strengthen democracy”.

The pound had initially rallied against the dollar on Thursday after a YouGov survey predicted a narrow win for Remain. But it began to plunge after 1AM Brussels time when the Leave side scored whopping victories in several towns in northern England.

By the morning, it had lost 11 percent of its value against the US currency, a much sharper drop than in the 2008 financial crisis, reachig levels last seen in the early 1980s.

The value of the euro and of safe-haven currencies, commodities and financial instruments, such as the Japanese yen, the Swiss franc, gold and US treasury bonds, rose sharply.

Leading British banks and insurance firms lost up to 20 percent of their value in early trading. Equity markets also fell in Asia and Australia among broader investor uncertainty.

'Not in panic mode'

Jorg Kramer, the chief economist at Germany’s Commerzbank, told EUobserver on Friday: “The reaction of the markets was significant but we are not in panic mode”.

He urged the EU to agree on a “clean divorce” that allows Britain, the EU’s second largest trading partner after the US, to continue to have privileged access to the single market.

“We won’t get such a signal today. But over time, European leaders will have to respect the decision of the British people and act in the interests of EU trade”, he said.

He said that, after the initial “implosion”, he expected markets to recover in the “medium term”. He also said that, if well managed, the developments need not cause recession either in the UK or in the eurozone.

He said it would be wrong to put Thursday’s events on par with the sovereign debt crisis that almost saw Greece leave the euro.

“It cannot be compared to the southern debt crisis, which put the very existence of the single currency in doubt”, he said.

Bright star

David Folkerts-Landau, Deutsche Bank’s chief economist, said: “Europe without its brightest star will certainly be a darker place”.

He echoed Kramer on the “clean divorce”, adding: “Brussels should … resist any pressure to inflict punitive measures on Britain as a warning to other member states. This must be the most amicable of divorces”.

In a statement issued later on Friday morning, Bank of England governor Mark Carney told the public that British banks were safe.

He said “the UK financial system can absorb any stresses” due to the high liquidity and capital reserves of its lenders.

He said British banks had been “stress-tested against scenarios far more severe than our country now faces” and that he was ready to inject £250 billion (€326bn) of extra money into the system if needed.

“Some volatility can be expected but we were well-prepared for this”, he said.

'Big cost on market’s self-confidence'

Kit Juckes, a currency strategist at French bank Societe Generale, told the Financial Times that “there is a grave danger of further [sterling] weakness in the weeks ahead”.

The British HSBC bank said the Leave win was “a seismic and largely unexpected event which is likely to have a massive impact on financial markets” as trading continued ahead of the weekend.

George Saravelos, a strategist at Deutsche Bank, said: “A combination of resolute ECB [European Central Bank] action, large and unquantifiable time lags in terms of the political risks and light positioning should mean that the market is more orderly than what is taking place in currency exchange markets [now]”.

But he said that the results of the Spanish election on Sunday, which could bring the maverick, left-wing Podemos party to power, could unnerve markets further still.

He said the fact the Leave result came as a surprise “will impose a big cost on the market’s self-confidence, ability and willingness to take risk” for a long time to come.

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