Business World

Monday 27 March 2017

Markets are only waking up to Brexit threat, Citigroup warns

Willem Buiter, chief economist at Citi Group Inc.
Willem Buiter, chief economist at Citi Group Inc.
Colm Kelpie

Colm Kelpie

A UK exit from the European Union is a serious risk that the international money markets are only now beginning to recognise, the chief economist at Citigroup has said.

On a visit to speak with investors in Dublin, Willem Buiter told reporters that there was well over a one in three chance that Britain would pull out of the EU, with a poll taking place as soon as the summer.

UK Prime Minister David Cameron said he is aiming to reach a deal on the UK's membership next month, paving the way for a national vote on whether to withdraw soon after.

Having pledged to hold an in/out vote by the end of 2017, Mr Cameron's comments signal he may call a summer poll.

Mr Buiter said a withdrawal would be a "disaster for Britain".

He feared that if a terrorist attack happened before the poll, a vote in favour of Brexit could become a reality. "It [Brexit] would be a disaster; I hope and pray it won't happen. If Isis pulls a Paris [style attack] in a British city within two months of the referendum, the emotional response to that could well mean a Brexit, even though the logical conclusion should be, 'let's strengthen the EU quickly'."

He said the markets are only now realising the implications of a vote to pull out because up to this point nobody was taking it seriously. "Outside the UK especially, nobody can understand why anybody in their right mind would vote to go out," he said.

"In the UK itself, I don't know what the reason was. I would have thought that the British market participants would be more in tune with the broader euro and EU hostile political atmosphere, and would have caused a bigger sell-off in sterling." Mr Buiter said Ireland would potentially benefit from extra foreign investment, but it would not make up for the loss of markets in terms of trade.

"I think it will be a disaster for Britain. It will be very bad news for the euro area as a whole and it would also of course be very bad news for Ireland, the trade links and the bilateral Schengen-type arrangement."

And he said that to discourage a repeat by another country, the remaining EU members would strike "an extremely tough bargain with the UK". He added: "Therefore years of uncertainty would hang over the UK."

At the end of another bad day for Chinese stocks, he said the world's second biggest economy is the "weak link" in the global economy. The Shanghai Composite Index slid 5.3pc at the close yesterday, extending last week's 10pc plunge. The extreme market swings this year have revived concern over the Communist Party's ability to manage an economy set to grow at the weakest pace since 1990. Mr Buiter said the stock market gyrations have little to do with the economy.

"It has, however, spooked markets worldwide. The exchange rate depreciation, the staggered... clunky depreciation, that is likely to continue and therefore encourage serious capital outflows and reserve losses, that has implications for the rest of the world."

Mr Buiter said the US was "holding up well" and he expects two rate rises by the Federal Reserve this year. "The worries about US growth are overdone.

"Yes, the December PMIs were disappointing, but they were still in positive growth territory," he said. "The Fed will not do anything to threaten the recovery. They'll be slow and plodding in raising rates."

Irish Independent

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