What the day after a Brexit could look like

Investors are growing increasingly anxious over the possibility of Britain quitting the European Union, roiling stock, bond and currency markets for days on end.

Markets, of course, have been reacting to the many polls rolling out in advance of the so-called Brexit referendum next week.

“The flight to safety is clearly evident in [foreign exchange] markets, with money moving out of European currencies and into distant havens such as the yen and dollar,” said IG market analyst Joshua Mahony in London.

“What initially looked like an anomaly has turned into the norm, with eight of the last 10 polls coming out in favour of a Brexit,” he added yesterday.

Investors have reason to be concerned. Here’s what Angelo Katsoras, National Bank’s geopolitical associate analyst, says “the day after a Brexit” could look like where markets and the economy are concerned:

1. The British pound and the London stock market would be hit, bond yields would rise and economic growth would falter on a short-term basis.

2. London’s standing as a global financial centre would also suffer. “Measures would be taken to move the clearing functions for euro-zone financial transactions from the U.K. to the euro zone. This has been a long-held goal of the euro zone.”

3. Britain’s attempt to strike a new free-trade deal, unfettered from EU rules, would “run into a wall of hostile EU public opinion angry at having been abandoned … The risk is that overly punishing the U.K., Europe’s second-largest economy, could tip an already economically fragile Europe into a downturn.”

4. After two years, Britain would no longer be protected from discrimination against its companies. “This would force some companies to redirect future investments into the EU in order to maintain market access.”

There could, of course, be severe political consequences as well. Prime Minister David Cameron would have to resign, Mr. Katsoras said, while “the very existence of the United Kingdom would also be at risk.” That, he said, could happen should Scotland want to stay in the EU.

Finally, an EU without Britain would “send an unequivocal global message of the EU’s economic and geopolitical decline,” he added. “The EU would lose its second-biggest economy (after Germany), its most free market-oriented member and its most powerful military force.”

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