REPORT
By Gökhan Kurtaran
London letter, week beginning June 27

U.K. Chancellor Osborne tries to reassure markets over consequences of Brexit

The unexpected result of the Brexit which came on the morning of June 24, ensured that Brits would wake up to an uncertain Friday followed by the decision of U.K.’s Prime Minister David Cameron to leave Number 10 in October.

Moody’s cut the U.K.’s rating outlook from stable to negative due to rising uncertainty. Standard & Poor’s (S&P) and Fitch Ratings are very likely to be on the way to take similar action following the Brexit decision in which 52 percent of those who voted opted to leave the EU.

Moreover, Scotland's first minister Nicola Stugeron said a second independence referendum is "highly likely" after the U.K. voted to leave the EU. She held a cabinet meeting at the weekend and emphasized that 62 percent of Scots voted to remain in the EU. Once again, the markets might face more uncertainty stemming from a possible independence referendum in Scotland. Sturgeon asserted that she at least would lobby with EU leaders to secure the interests of Scots to gain access to the single market.

On Monday morning European stocks opened sharply lower as the fallout from Britain's decision to leave the EU continues, sending the pound falling as well. European STOXX 600 was down 1.12 percent and London's FTSE 100 index was down 0.82 percent.

However, both messages from the Central Bank of England Governor Mark Carney and U.K. Chancellor George Osborne appear to have calmed the panic in the markets.

Right after the results, Carney said, “Some market and economic volatility can be expected as this process unfolds. But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning…The Bank will not hesitate to take additional measures as required as those markets to adjust and the U.K. economy moves forward. Moreover, as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250 billion of additional funds through its normal facilities.”

On Monday morning just before the markets open, Osborne also tried to calm down the Brexit shock. The finance minister said that financial market volatility was likely to continue but the government had spent the "last few months putting in place robust contingency plans for the immediate...aftermath" of the result.

The week ahead

This week will see much political noise with Cameron’s declaration that he would be leaving his seat in October. Former Mayor of London and the leader of the Brexit campaign, Boris Johnson, is expected to announce his bid to run for the Conservative Party leadership. Even if his fortune turns ensuring that he ends up in Number 10 soon, his task of drawing up a new relationship with the EU will not be easy. Negotiations could take years as we have seen with the Canada-EU trade deal which took nearly seven years despite the smaller scale of the agreement.

On the other hand, Johnson signalled to markets that he would have a constructive approach towards the EU. Writing in the Telegraph today, Johnson says the U.K. will continue to "intensify" co-operation with the EU following the country's vote to leave.

"British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI - the BDI - has very sensibly reminded us, there will continue to be free trade, and access to the single market,” he said.

An exiting political and economic phase in U.K. history is just about to start and this week it is expected to be dominated by messages for reassuring markets in order to calm down volatility.

27 Jun,2016

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