Osborne: there may be trouble ahead

UK finance minister George Osborne tried to calm financial markets on Monday morning following the turmoil that greeted Britain’s narrow vote to leave the EU — but the chancellor admitted that “it will not be plain sailing in the days ahead.”

Financial markets remain volatile amid uncertainty as to whether the UK Government will go ahead and trigger the so-called Article 50 process to set in motion a two-year timetable for leaving the EU.

Reuters reported that globally, about $2.08 trillion was wiped off share prices on Friday alone, the biggest daily loss ever, according to Standard & Poor’s Dow Jones Indices.

On Monday, sterling plunged to a 31-year low against the US dollar — falling as low as $1.3209 — and yields on 10-year UK government bonds fell below 1% for the first time as demand from investors surged for the perceived safety of government debt securities.

“It is inevitable, after Thursday’s vote, that Britain’s economy is going to have to adjust to the new situation we find ourselves in,” said Osborne.

“In the analysis that the Treasury and other independent organisations produced, three particular challenges were identified – and I want to say how we meet all three.

“First, there is the volatility we have seen and are likely to continue to see in financial markets …

“Those markets may not have been expecting the referendum result – but the Treasury, the Bank of England, and the Financial Conduct Authority have spent the last few months putting in place robust contingency plans for the immediate financial aftermath in the event of this result.

“We and the PRA have worked systematically with each major financial institution in recent weeks to make sure they were ready to deal with the consequences of a vote to leave.

“Swap lines were arranged in advance so the Bank of England is now able to lend in foreign currency if needed.

“As part of those plans, the Bank and we agreed that there would be an immediate statement on Friday morning from the Governor, Mark Carney.

“As Mark made clear, the Bank of England stands ready to provide £250 billion of funds, through its normal facilities, to continue to support banks and the smooth functioning of markets.

“And we discussed our co-ordinated response with other major economies in calls on Friday with the Finance Ministers and Central Bank Governors of the G7.

“The Governor and I have been in regular touch with each other over the weekend – and I can say this this morning: we have further well-thought-through contingency plans if they are needed.

“In the last 72 hours I have been in contact with fellow European finance ministers, central bank governors, the managing director of the IMF, the US Treasury Secretary and the Speaker of Congress, and the CEOs of some of our major financial institutions so that collectively we keep a close eye on developments.

“It will not be plain sailing in the days ahead.

“But let me be clear. You should not underestimate our resolve.

“We were prepared for the unexpected.

“We are equipped for whatever happens.

“And we are determined that unlike eight years ago, Britain’s financial system will help our country deal with any shocks and dampen them – not contribute to those shocks or make them worse.”

Osborne said the second challenge was the uncertainty that a vote to leave would bring in the coming months and beyond as Britain worked with European allies “to create a new relationship.”

He said the Prime Minister had given the country time to decide what that relationship should be by delaying the decision to trigger the Article 50 procedure until there is a new Prime Minister in place for the autumn.

“Only the UK can trigger Article 50, and in my judgement we should only do that when there is a clear view about what new arrangement we are seeking with our European neighbours,” said Osborne.

“In the meantime, and during the negotiations that will follow, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.

“However, it is already evident that as a result of Thursday’s decision, some firms are continuing to pause their decisions to invest, or to hire people.

“As I said before the referendum, this will have an impact on the economy and the public finances – and there will need to be action to address that.”

Osborne said the third challenge was that of ensuring that Britain was able to agree a long-term economic relationship with the rest of Europe that provided for the best possible terms of trade in goods and services.

“I intend to play an active part in that debate – for I want this great trading nation of ours to put in place the strongest possible economic links with our European neighbours, with our close friends in North America and the Commonwealth, and our important partners like China and India.

“I do not want Britain to turn its back on Europe or the rest of the world.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.