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Tuesday, June 21, 2016

This Is What May Happen to the World Economy After a #Brexit










The ripple effects for the global economy following a Brexit are too many to list. Sebastian Mallaby a senior fellow for international economics at the Council on Foreign Relations said there would be enormous uncertainty following a Brexit vote. The European Union buys roughly half of the UK's exports, Mallaby said, adding that a Brexit would 'rip up the rules' that govern those exports. On Tuesday, billionaire investor George Soros said in an op-ed in The Guardian, that the British pound could sink following a UK departure from the European Union. He said the pound could lose more than 15 percent against the dollar - the decline seen in September 1992, when Britain exited the European Exchange Rate Mechanism, a band that aimed to lower currency volatility. 'I think that's plausible,' Mallaby said, adding that Britain is more vulnerable now than in 1992, given its higher current account deficit as a share of GDP. Mallaby also said it's difficult for the Bank of England to help stop a potential pound devaluation, given how interest rates are already close to zero at 0.5 percent. 'There are a bunch of reasons why this could be worse than last time,' Mallaby said. Mallaby pegs the probability of a Brexit at 33 percent, adding that the initial economic implications would first be felt in Europe. 'There would be a selloff of peripheral bonds, as investors get scared that the glue holding Europe together is weakening,' he said. 'Now you have a weaker Europe and a much weaker Britain - which doesn't have a catastrophic effect on the U.S., but I think you would feel something in terms of diminished export performance from the U.S. into Europe and a stronger dollar.' In testimony before the Senate Banking Committee in Washington on Tuesday, Federal Reserve Chair Janet Yellen said a Brexit vote could spark 'a period of market volatility that would affect financial conditions and the U.S. economic outlook.' Mallaby said the biggest U.S. impact would be political, not economic. 'The key [U.S.] ally in a complicated world remains Western Europe, which would be tipped further into an introverted frame of mind.' TheStreet's Scott Gamm reports from Wall Street.

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