UK coming to terms with Brexit storm aftermath
June 24th, 2016 will now be etched in the memory of 14 million Britons as Black Friday, and Independence Day for 17 million others. In a span of four days, the Brexit storm has brought the equivalent of wind, hail, lightning, and a torrential rainfall in the economic and geopolitical arena.
Sterling’s not so sterling performance
The Sterling Pound took a pounding after the Leave supporters won UK’s historic referendum sending investors into frenzy. The outcome wiped out more than two trillion US Dollars in value from markets around the world on Friday and an additional one trillion dollars on Monday.
On Friday, the Pound tanked to levels last seen in February 1985, trading at 1.32 to the US Dollar down from 1.49 before the referendum results were announced and has remained little changed since then.
The Central Bank of Kenya website quotes the Pound at 133.53 shillings on Tuesday compared to Friday’s close of 150.22 shillings. This is a good thing for Kenyan importers because it is now cheaper to buy goods from the UK but exporters are taking a hit since the returns on their products have diminished.
Credit rating downgrade
The big three credit rating agencies, Moody’s, Fitch and S&P Global which control 95% of the ratings industry on a global scale have all downgraded UK’s impeccable credit rating. Moody’s was the first to take concrete action on Friday, lowering the island nation’s standing from stable to negative due to post Brexit uncertainty which may diminished economic growth.
S&P Global and Fitch also moved to strip Britain’s credit rating on Monday dealing the country further blows in its economic standing. Both firms lowered the rating by two levels from AAA to AA adding that more downgrades may follow. They are concerned that there will be a major economic slowdown as countries choose to defer investments as a result of the rattling of the currency, debt and stock markets which is bad for business.
A lower credit rating that UK debt is considered a risky affair and investors will demand higher rates of returns, which may push up the country’s interest rates.
The Brexit tsunami has also wreaked havoc in the political sphere. The surprise Brexit outcome in favour of the leave camp brought to a halt Prime Minister David Cameron’s six- year reign after he resigned shortly after the results were announced and is expected to leave office in October this year after a new leader for his Conservative Party is chosen. This has left a political vacuum in the ruling Conservative Party, which may be filled by a pro-Brexit campaigner such as Boris Johnson who fronted the leave campaign. Jonathan Hill, who was until Sunday Britain’s Financial Services Commissioner to the EU, also resigned from his post on Saturday.
The Brexit outcome has ignited a political firestorm that has seen the Labour Party, UK’s opposition party, embroiled in rather disgraceful leadership wrangles. The sacking of shadow Foreign Secretary Hilary Benn on Sunday has triggered mass resignations, with over 40 opposition members having resigned as a revolt against Jeremy Corbyn, the Labour Party leader. Benn was sacked for allegedly planning a coup. Corbyn has already appointed a new shadow cabinet and remains adamant he will not step down despite allegations from party members that he was lukewarm in the referendum campaign.
While Britain voted by 52% to 48% to leave Europe, Scotland, which is the UK’s northernmost nation backed remain by 62%. Speaking after the referendum outcome, Scotland’s First Minister Nicola Sturgeon said that it will be democratically unacceptable for the country to be taken out of the EU against its will. The Scottish Parliament may begin preparing legislation for a second vote.
Close to four million UK Citizens have already signed an online petition calling for a second referendum vote. The law stipulates that another referendum can be held if the remain or leave vote is less than 60 percent based a turnout less than 75 percent. The vote outcome was 52% to 48% to leave the EU with a voter turnout of 72%. David Cameron has ruled out a second referendum.
The U.K has lost its grandeur over the past 96 hours and what remains to be seen is whether the turmoil in the financial markets is just a major overreaction to the Brexit outcome or the onset of a free fall that global markets need to buckle up for.
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