Mario Draghi and Janet Yellen poised for EU referendum fallout

Mario Draghi

The two most powerful central bankers have warned that they are on high alert for financial and economic fallout from the EU referendum, amid signs that the result of Thursday’s vote still hangs in the balance.

On a day that saw Monday’s big rises in shares and the pound halted by polls showing the race too close to call, Mario Draghi, the president of the European Central Bank, said he was prepared to use every available tool to protect the eurozone in the event that the UK decides to leave.

Draghi said: “We will closely monitor the evolution of the outlook for price stability. We stand ready to act by using all the instruments available within our mandate, if necessary, to achieve our objective. In particular, the ECB is ready for all contingencies following the UK’s EU referendum.”

Janet Yellen, the chair of the US Federal Reserve, told Congress that in a world marked by sluggish growth, weak inflation and low interest rates investors could quickly become more risk averse.

“One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions,” Yellen said. “It could launch a period of uncertainty [with] negative economic consequences for the UK spilling over into Europe.”

As the referendum campaign reached its closing stages, the FTSE 100 Index marked time - closing 23 points higher at 6,227 points. The pound reached its highest level against the dollar since January during early trading on the foreign exchanges, but later slipped back to close slightly lower at just under $1.47.

George Soros, the speculator who drove Britain out of the exchange rate mechanism, has warned that the UK markets faced a Black Friday in the event of a Brexit vote. This prompted a response from Norman Lamont, who was running the Treasury on Black Wednesday 24 years ago. He said: “The devaluation of sterling in September 1992 didn’t do the UK economy any harm, far from it. Nor would a fall in the pound this time necessarily be a disaster. The key difference between now and 1992 is that today the pound is floating and any devaluation could be self-correcting and temporary.”

But other international economists backed Soros’s view that there would be serious market turmoil in the event of a vote to leave.

Larry Summers, the former US treasury secretary, wrote in a blogpost: “A Black Friday could follow referendum Thursday. It is likely that foreign investors in British stocks would lose 15%off the bat, adding together market declines and currency losses.”

He added that despite attempts to improve supervision of the financial system since the near-meltdown prompted by the Lehman Brothers collapse in September 2008, it was impossible to say how the system would respond to a Brexit vote.

“A return of systemic risk as large losses lead to cascading liquidations cannot be ruled out. At a time when central banks have far less ammunition than they did in 2008, the consequences could be grave,” he said.

Nouriel Roubini, the economist nicknamed Dr Doom after accurately predicting the 2008 crisis, supported David Cameron’s view that Brexit would leave Britons worse off.

“Brexit could stall the UK economy and tip it into a recession as the shock to business and consumer confidence could be severe,” said Roubini, who teaches at New York University’s Stern school of business.

While giving evidence to the European parliament, Draghi said: “We monitor all economic, political and legal developments so we can assess and manage the ensuing risks. We have existing swap lines with other central banks. The agreements are there, we want to make sure they are useable, active and adequate.

“The event will have short and long-term effects. It is hard to say what sort of action we would take in each contingency.”

But Mark Weisbrot, co-director of the Washington-based thinktank, the Center for Economic Policy Research, said: There is a Mafia-like quality to the threats emanating from EU officials, who are acknowledged to be contemplating how much punishment they can mete out to the UK if the people should dare to vote the wrong way.”

He added that the message was: “Vote remain and nobody gets hurt.”

Powered by Guardian.co.ukThis article was written by Larry Elliott, for The Guardian on Tuesday 21st June 2016 19.18 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts