Brexit worse on GBP than 2008 financial crisis

A British vote to leave the European Union has shocked the world’s financial markets and has brought the British pound down to a 31-year low, its biggest fall in history.

The final results of the historic EU referendum – a 52 to 48 split in favour of Britain’s exit – have set the UK down an uncertain path towards independence and represent the largest blow to European efforts at greater unity since World War II. But the exit vote is also bad news for investors. 

British banks took a $130bn hit on Friday, with financial giants such as Barclays and Lloyds down 30 percent. 

The pound sterling sank as low as $1.35, a near 10 percent drop in value and its lowest rate against the dollar since September 1985, before recovering to $1.37.

The fall was reportedly even larger than the drop during the 2008 global financial crisis.

READ MORE: Brexit – What will happen next?

If the pound continues to weaken, the UK’s central bank, the Bank of England, may be forced to intervene. 

The bank will have to either shore up the currency by purchasing more pounds with other currencies or raise interest rates, a move that would hit UK citizens with loans and mortgages. 

Property analysts in the UK have said that a British exit from the EU will bring about a slowdown in property price growth, and even a fall in prices. 

And while the long-term effects of a Brexit on the markets are less clear, some analysts have warned that an exit could cause mass job cuts and a significant drop in foreign investments. 

“It’s an extraordinary move for financial markets and also for democracy,” said Richard Benson, the co-head of portfolio investments of London-based currency specialist Millennium Global.

“The market is pricing interest rate cuts from the big central banks and we assume there will be a global liquidity add from them in the next few hours,” he added.

Many global investors have dropped the pound and fled to safe havens such as gold and the Japanese yen.

Such a body blow to global confidence could prevent the US Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from all the major central banks, Reuters news agency reported.

Global currencies suffered throughout the day as Asia and Eastern Europe woke up to news of a Brexit and alarmed investors worried about pulling funds out of emerging markets. Poland, where many of the Britain’s eastern Europeans come from, saw its zloty slump by at least 7 percent.

Analysts said they are worried that London’s status as a financial capital may now be eroded, especially if the UK loses “passporting” rights, which allow banks to reside in the UK and sell their products and services throughout the EU.

Standard & Poor’s, an American financial services company, has said it will strip the UK of its AAA credit rating.

Fears of recession

Financial markets have been gripped for months by worries about what Britain’s exit from the European Union will mean for Europe’s stability.

“Obviously, there will be large spill-over effects across all global economies if the Leave vote wins. Not only will the UK go into recession, Europe will follow suit,” predicted Matt Sherwood, head of investment strategy and fund manager at Perpetual in Sydney.

Richard Buxton, head of UK equities at Old Mutual Global Investors, predicted a similar fate, saying Britain’s decision to leave the EU is likely to result in the country entering into recession, adding that domestically focused British businesses would be hardest hit.

“Investors should now brace themselves for an unpleasant period of relatively indiscriminate selling as funds aim to meet redemptions in conditions where liquidity may be more limited than usual,” Buxton said.

However, Mark Carney, the Bank of England chief, has said that the bank can provide liquidity in foreign currency if it is needed to ensure market stability. Similar assurances were made by Bank of Japan Governor Haruhiko Kuroda.