Thursday, June 30, 2016

Global markets bounce but cloud over London banks, EU passports

With global markets less stressed about Britain's shock decision to leave the European Union, the focus is turning to the consequences for Britain including its once prestigious banking sector.

EU leaders are warning Britain that its financial services industry including a major hub in the City of London could be damaged once the exit provisions under the Lisbon Treaty are triggered.

Critically the current right to a European Union passport is set to disappear under the Brexit meaning the current easy access Britain has to financial services in Europe could become history.

The chair of the Eurozone group of finance ministers Jeroen Dijsselbloem says major banks based in London could see their businesses decline and prompt some to leave.

"Larger international financial institutions, if they have to decide where do we go and where do we invest, will take into consideration that London is in the future outside this very large European market," Mr Dijsselbloem told the BBC.

"London and its financial services industry is servicing all of Europe now and they do that with the (EU) passport that gives them access to all the markets in Europe.

"That position will inevitably change."

Britain's finance sector employs more than two million people across the UK, many in the City of London.

Most workers have an EU passport which currently gives them free movement to make deals and to service clients across Europe.

The Brexit impact on British banking and the City of London was sitting quietly in the background in the leadup to the referendum.

But London lawyer Simon Gleeson says with deals potentially unravelling for the British banking sector there would be an impact on related businesses in the United Kingdom.

"Passporting is pretty much essential for the provision of services to European corporates," Mr Gleeson told the BBC.

"If you take passporting away then something changes in the city of London and some businesses will simply have to be relocated elsewhere."

In Brussels as the fallout continues, the German chancellor Angela Merkel warned that whatever deal is hammered out, Britain must honour the free freedoms of the EU - the free movement of workers, goods, capital and services.

"The United Kingdom needs to clearly state its intention as to how it wishes to shape its future relationship with the European Union," Ms Merkel said.

"Access to the single market will only be possible with due respect of the four freedoms."

Meanwhile, global markets rallied for the second day in a row with some investors comforted that the Bank of England and other central banks are poised to blockade any Brexit related credit crunch.

London's main index ended 3.6 percent higher and has now recovered its Brexit related losses.

The Australian sharemarket bounced in the global optimism and the big miners were helped by a higher iron ore price.

The All Ordinaries Index was index 1.4 percent higher in late morning trade.

Tuesday, June 28, 2016

Brexit political turmoil escalates, UK credit rating downgraded

The political and economic fallout from Britain's decision to leave the European Union is continuing to escalate.

Here's my report broadcast on The World Today

Britain's outgoing prime minister David Cameron has once again called for unity after the "leave" vote triggered more turmoil in his Conservative party and the Labour opposition.

European leaders are urging Mr Cameron not to waste time in getting the agreed mechanisms in place to exit the EU as quickly and cleanly as possible.

Global sharemarkets ended sharply weaker and two major ratings agencies downgraded Britain's credit status adding to concerns that the UK might slip into recession.

Sunday, June 26, 2016

Central banks on emergency standby with Brexit fallout set to escalate

Central banks around the world are standing by to intervene amid fears that the global fallout from Britain's exit from European Union will escalate in the coming days.

Listen to my report broadcast on The World Today

The Bank for International Settlements - known as the central bank of central banks - is warning of a "period of uncertainty and adjustment" given Britain's status in the global economy and the impact of it withdrawing from the EU.

The bank's general manager Jaime Caruana says "extensive contingency plans" are in place by central banks and the private sector to limit market disturbances such as the shock Brexit decision.

"Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning," Mr Caruana said at the Bank's annual general meeting in Basel, Switzerland.

"Central banks have acted swiftly in the past. They stand ready to act again, and they have the tools."

The Australian sharemarket is set to open 0.1 percent higher tomorrow (Monday) after losing $50 billion in value as part of a global selloff.

The Bank of England moved swiftly after the Brexit outcome and announced it was ready to provide A$460 billion in liquidity to help calm currency and equity markets which went into free fall.

Bank of England governor Mark Carney - who had previously warned a "leave" vote would have serious economic consequences - declared he would take "all necessary steps" to ensure financial and monetary stability.

In Australia, the Reserve Bank provided a briefing to both the government and the opposition under caretaker conventions in the leadup to the Brexit referendum.

In its annual report released on Sunday evening Australian time - but written before the Brexit shock - the BIS pointed to "the declining impact of monetary policy" on domestic economies eight years after the Lehman Brothers collapse.

The BIS calls for "stability oriented monetary policy" and that policy makers should take financial stability into account at all times "during both booms and busts".

"We need policies that we will not once again regret when the future becomes today," the BIS warns.

The BIS message comes against the backdrop of slowing global growth, low inflation, falling commodity prices and concerns that traditional central bank tools like quantitative easing are not working.

In comments made with the release of the annual report, Jaime Caruana said despite deleveraging in the private sector problems were building elsewhere.

"Signs of unsustainable financial booms began to appear especially in emerging market economies," Mr Caruana said.

Mr Caruana urged a global rebalancing to deal with what he called a a pattern "similar to that of previous boom episodes".

Saturday, June 25, 2016

Brexit market turmoil but EU ambassador says little impact on Australia

Britain's shock decision to exit the European Union should have little impact on Australia's diplomatic and trade relationships, according to the EU's ambassador to Australia.

Speaking to the ABC's AM program, Sem Fabrizi said despite global financial fallout from the Brexit vote nothing would change immediately.

"Until the new agreement for the separation from the UK takes effect, rights and obligations under the treaties will continue so there will be no immediate change," Mr Fabrizi said.

"Certainly Australia is a stronger partner of the European Union and we will continue to work with Australia as we will continue to work with all our partners."

But Mr Fabrizi said the Brexit outcome was not a shock to the EU and that said "war gaming" had been under way to manage the unexpected.
"Certainly not. We were expecting a close call and the people of Britain have decided. A democratic decision has been taken," Mr Fabrizi said.

"So we're now in a period where clarity is needed more than ever. But there's a procedure in place and we would like to have this process started as soon as possible."

Analysts estimate US stocks lost US$700 billion contributing to global losses of around US$3 trillion.

The banking sector was hardest hit with Citigroup down eight percent and Goldman Sachs and JP Morgan Chase five percent weaker.

The losses on Wall Street follow plunges across Europe in the wake of the Brexit vote with Paris down 8.6 percent, Frankfurt 6.2 percent weak and Madrid plunging 12.3 percent.

The Chicago volatily index which measures market anxiety surged as much as 48 percent given the unknowns about the process for Britain's exit from the European Union.

But Sem Fabrizi told AM that while there was complexity ahead the EU would not seek payback with Britain.

"The spirit is always to find the best solution. I don't think we need to enter a conflict mode."

Thursday, June 23, 2016

Brexit "leave" vote to spark UK recession, economist warns

The polls might be tipping a tight outcome in the Brexit referendum, but behind the scenes experts have been war-gaming the potential impact of a possible "leave" vote.

Research by the London School of Economics in "Life After Brexit" is warning Britain would most likely fall into recession if it leaves the European Union as a myriad of agreements unravel over several years.

The report's co-author Professor Swati Dhingra is the latest to agree with warnings from the British Treasury that a "leave" vote would be a shock to the UK economy and rattle global financial markets.

Professor Dhingra speaks with the ABC's Peter Ryan