The euro exchange rate could slump lower following an ECB pledge to flood the euro-zone financial system with extra money if credit markets seize up after a Brexit vote. As of 08:00 GMT this morning, one UK pound exchanged 1.2670 euros, or 0.11% higher (GBP/EUR). The current 14 day average GBP/EUR exchange rate adjusts to 1.275.
The European Central Bank’s pledge came as Germany’s IFO institute warned that Brexit could inflict severe damage on the German economy, shaving 3% off GDP over the long run in its worse case scenario. “Germany has very little to gain and an awful lot to lose.” said Clemens Fuest, IFO’s director.
It is understood that the ECB will keep currency swap lines open to ensure that finance houses are flush with euros. Some of the biggest players in the city are European banks such as Deutsche Bank with a London staff of 8,000, as well as Commerzbank, BNP Paribas, Societe Generale, and Unicredit.
Several of them are in the eye of the storm. Deutsche Bank shares fell by over 4% to 12.69 euros in early trading on Thursday, plunging beneath its post Lehman trough to an all time low. Italy’s Unicredit share price fell 3.3%, now having lost a massive 94% of its value since 2008.
Brexit Worse for Europe and the Euro Currency
“We’re seeing bank shares attacked from left, right, and centre in Europe. If they let a liquidity shortage happen, it would be total destruction. The euro-zone authorities know that Brexit may be terrible for Britain but in the medium term it is just as bad or worse for Europe.” said one hedge fund trader.
However, Gabriel Stein from Oxford Economics said a Brexit vote may prove to be a storm in a teacup for financial markets. There is a lot of chatter. Most of its stoked by doom warnings from the very bodies supposed to uphold financial stability, but the mechanism for a credit seizure is far from obvious to veteran observers of the markets.
“I simply cannot see how it would lead to any meaningful drying up of funds. There may be a panic for a couple of days but once the central banks and the finance ministers step in to say everything is fine, I think it will subside.” said Stein.