Financial markets appear to have been caught off-guard by Britain’s decision to exit the European Union, believing it would remain, writes..
Professor Richard Holden talks about the economic impact of Brexit.
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The S&P ASX200 has finished 3.3% down at the close, wiping off approximately $50 billion in value, while the Australian dollar has dropped 3.4% to 73.4 US cents.
Richard Holden, Professor of Economics at UNSW says the volatility is likely to continue at least for another 24 hours.
“We could see volatility, perhaps not as extreme as the current levels, for a really extended period of time,” Professor Holden says.
One of the major factors in this will be how affected UK banks and therefore Australian banks will be by this decision, as they rely on short term funding for their operations.
“If those markets start to dry up and there’s uncertainty about their funding getting rolled over, one day to the next, then that’s when things can go pear shaped within an incredibly short period of time,” he adds.
The position of hedge funds, banks and other financial institutions in betting on currencies in over-the-counter markets (not regular currency markets) in times like this, also adds to the uncertainty.
“Basically we don’t know, what we don’t know and suddenly there’s a liquidity crunch and someone gets into trouble and that has flow-on effects like we saw in 2008,” Professor Holden says.
He also warns that a drop in the Australian dollar shows that money could flow out of Australia and back to the UK as financial institutions there change their positions.
In the longer term, Brexit could affect the way Australian companies trade with the European Union through the UK.
“All of a sudden that’s going to be more complicated, it’s going to have to go through under some new trade agreement and we know that a series of bilateral trade agreements are always more complicated and have more nuance than large multilateral trade agreements,” Professor Holden says.
All this comes as Australia goes into the last week of an election campaign and this volatility will keep economic management top of mind for Australian voters.
“I don’t think either side of politics in Australia has an exclusive right to say they are going to be the best economic managers, I guess we’ll have to wait and see about that as well.”