Brexit panic knocks pound to seven-year low

The pound tumbled to a seven-year low and the UK was warned its credit rating was at risk on Monday as the effect of Boris Johnson’s backing for the Brexit campaign was felt in financial markets.

However, as traders and city economists wagered that the London mayor’s intervention had raised the probability of a leave vote in June’s EU referendum, high-profile business figures threw their support behind prime minister David Cameron’s push to stay in the EU.

The bosses of some of Britain’s top companies, including easyJet, the defence contractor BAE Systems and Shell, signed a letter backing a vote to stay in Europe. The letter was signed by the heads of about a third of the businesses on the FTSE 100 index of Britain’s largest stock-market-listed companies.

There were also some notable absentees from the list, including Tesco and Sainsbury’s. Rival supermarket chain Morrisons, which dropped out of the FTSE last year, also declined to sign the letter, which was compiled by City PR boss Roland Rudd. The supermarket groups, whichdid not back either side before the Scottish referendum, said the choice over whether to stay within the EU was one for the British people.

On the markets, sterling dropped to a seven-year low against the dollar at $1.4057, and currency experts forecast more sharp falls in the run-up to the public vote. Market jitters have been made worse by widespread mistrust of opinion polls after they failed to predict last year’s clear electoral win for the Conservative party.

“The next four months will be racked with uncertainty. Recent referendum polls have been neck and neck. And, in any case, as illustrated by last year’s general election and the 2014 Scottish referendum, even if they do start to give a clearer picture of the likely outcome, the opinion polls cannot be trusted,” said analysts at Daiwa Capital Markets.

Investment banks renewed warnings of the economic risks from a Brexit, predicting exports and investment would be hit. Britain’s biggest bank, HSBC, used its annual results update to warn of a “heightened risk of uncertainty” from a vote to leave the EU. Those fears were reflected in currency markets where the pound suffered its biggest one-day drop of Cameron’s premiership.

The credit ratings agency Moody’s put the government on alert that a decision to leave the EU could lead to a downgrade of the UK’s strong credit score, potentially pushing up the cost of government borrowing. Moody’s said the outcome of the vote “remains too close to call”. In the event of a vote to leave the EU, the economic costs would outweigh the benefits, Moody’s said.

“The outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit-negative for the UK economy,” said Kathrin Muehlbronner at Moody’s.

Moody’s rates the UK Aa1, one notch below the coveted top triple-A score. The agency said if the British public voted to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook currently. Such an forecast would imply a greater chance of a downgrade of the Aa1 rating in the future.

Rival ratings agency Fitch said a Brexit would bring short-term disruption and long-term risks for the UK. Standard & Poor’s, the only big ratings agency still giving Britain the top ranking, has previously flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy.

Presenting the bank’s results on Monday, HSBC chairmannoted that the UK was the site for a disproportionately large number of big company headquarters and that a “period of uncertainty” after a leave vote would be very damaging. “Every business in the UK would be reviewing its supply chain, legal agreements and its licences,” Douglas Flint said.

Supporters for the leave campaign have countered that in the long term the UK would be better off outside the EU. Explaining his backing for the Brexit camp, Johnson said he wanted “a better deal for the people of this country, to save them money and to take control”.

Economists at Citi investment bank raised the probability of Brexit from 20-30% to 30-40% after Johnson and the justice secretary, Michael Gove, announced their support for the leave campaign.

“So far, polls still suggest that the UK is more likely to vote to stay in the EU than to leave, and indeed ‘remain’ is still our base case scenario,” Citi economists Tina Fordham and Michael Saunders said.

“Having said that, following the decision of credible and popular leaders like Johnson and Gove to back the out campaign, we now increase the probability that the UK votes for Brexit.”

The UK’s stock market largely shrugged off Brexit fears on Monday, with the FTSE 100 index rising 1.5% to 6,037.73. But there were some notable fallers. Shares in housebuilders dropped sharply on worries the run-up to the referendum, and a possible leave vote, could hurt the property market.

Powered by article was written by Katie Allen and David Hellier, for on Monday 22nd February 2016 19.17 Europe/ © Guardian News and Media Limited 2010


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