If Britain chooses to leave the EU on Thursday, it will make economic waves both in the short and medium terms.
One of the most immediate effects would be a sudden drop in the value of the pound, and a severe capital flight, according to analysts at Credit Suisse.
It could be as bad or worse as Black Wednesday — the day the pound collapsed in 1992 after the British government pulled the currency from the European Exchange Rate Mechanism after failing to defend its high valuation against the Deutsche mark.
The research echos George Soros, who famously made £1 billion betting against the pound that day, writing in The Guardian on Monday, “that after a Brexit vote the pound would fall by at least 15% and possibly more than 20%.”
Here’s the chart from Credit Suisse putting Black Wednesday in context:
On Black Wednesday itself — September 16 1992 — the pound fell 4%. It had lost around 15% of its value by the end of the month.
If the markets threaten a drop of a similar magnitude, the Bank of England might be tempted to step in to support the currency because the fallout from a collapse could be much worse than in 1992.
Here’s Credit Suisse:
- Wider current account deficit: “At the time of Black Wednesday the UK’s current account deficit was near 2% of GDP, but since then it has ballooned to nearly 7% of GDP (now the widest deficit in G10), and gross international assets and liabilities have increased to north of 500% of GDP. These factors might suggest that GBP has likely become more vulnerable to external shocks.”
- Asset prices are more vulnerable. “In 1992 the UK property market had suffered a period of stagnation, and the FTSE100 had fallen by over 15% between May and September 1992. By contrast, the FTSE100 has broadly been stable since March 2016 and is still near post-crisis highs. UK property price growth has stalled in recent months, but both London and UK prices are still near their highest in years.”
With so much at stake, the Bank of England might want to try to prop up the currency, using its currency reserves it what might prove to be a costly fight.