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The ‘Brexit’ and its finance consequences for the United Kingdom

The ‘Brexit’ and its finance consequences for the United Kingdom

The United Kingdom has two years to negotiate their exit from the European Union, but economic analysts have already started to study the possible economic consequences of the Brexit for British citizens.

27 june 2016

“Uncertainty”.  That is the word which best describes the current situation of the British, European and World’s finance market as a consequence of the Brexit approval. The United Kingdom’s decision to leave the European Union could have a negative impact on the Islands’ economy:

 

Economic Recession The OECD estimates that each British family will lose around €3,000 per year. For its part, British economists foretell a 3,6% drop in the Islands’ economy and that of a 6% in the worst scenario if they also decide to leave the common market.

Tax rise. George Osborne, British Chancellor of the Exchequer, announced last week that leaving the EU would mean, for public coffers, a loss of €39,000 millions, which would oblige to approve cost-cuttings and tax rises.

A new business model Those in favour of leaving, requested a greater commercial autonomy from the European Union. After the referendum’s results, it is yet to be seen what commercial model will be adopted by the Great Britain. A priori, the scenarios can be two: introduction in the  European Free Trade Organization, as other countries did (Norway, Switzerland or Iceland), or a greater sovereignty to trade and control their frontiers. This second option would affect with a rise of the British living standards, which export a 51,4% of their sales to the continent.

Flight of Capitals. Germany and the United States are the main destinations for the €48,000 millions deposited in British funds which have left for safer values. Analysts foretell that, at a global level, investments in British assets will keep on droping.

The Brexit would mean, for public coffers, a loss of €39,000 millions, which would oblige to approve cost-cuttings and tax rises

Pound Depreciation. The most immediate reaction to the loss of value of the British currency, which -during Friday- dropped to 1985 levels, being $1,32.

Higher Types of Interest and Property Risk. In light of the lack of investors, the British State could attract potential customers offering them higher types of interest. According to Javier Flores, head of the Department of Analysis at Asinver, this could turn into a rise in the risk premium. The rise of interest types would make mortgages more expensive giving way to non-payment situations.

Unemployment and Relocation. The OECD calculates a loss of 820,000 job posts, 110,000 of which are at the City of London (British finance epicentre). JP Morgan estimated up to 4,000 dismissals as a consequence of the Brexit.  Likewise, many companies -such as Citigroup- have expressed their intention to move to other EU countries.

Bank Reactions

The Bank prepares to face a risky situation. The challenges for each entity or institution are different and the solutions are complex and uncertain.  The European Central Bank (BCE), along with the Bank of England (BoE) have already committed to open swap lines from 24 June. As stated by elEconomista.es, this measure would help “reduce the tension among the agents which exchange currencies and finance flows”, and to maintain the markets liquidity. For its part, Spain’s big banks have requested a “dedramatization“ of the situation.

Tags bank , economy , capital , taxes
Published by: Pablo Martí Prats
 
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