Brexit: The Crisis Begins

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In the meantime, there are immediate consequences and risks. The Transatlantic Trade and Investment Partnership is probably dead. The sterling crisis and the less dramatic fall in the euro are likely to leave some UK and Eurozone financial institutions with large losses on net dollar and other foreign currency positions. While the British banks, given the magnitude of the sterling plunge, are the obvious focus of concern, many Eurobanks are undercapitalized. Worse, the Eurozone in theory will use a bank bail-in if any institution becomes impaired. We've warned that this is a prescription for bank runs. And it's not just banks that are exposed; operating businesses may have foreign currency commitments they will struggle to meet.

The British government is likely to lose its AAA rating, which also means higher funding costs for its banks, since their borrowing rates are at a premium to the local currency risk-free rate. A recession is almost certain, since the UK exports services and imports goods and many of its imports don't have ready substitutes, while the US and European banks will be doing everything they can to poach both British bankers and their clients, denting the UK balance of trade even more. Richard Smith also points out that a Brexit could imperil Ireland's ability to operate as a tax haven. And that raises the issue that both Scotland and Ireland supported Remain. Is a UK breakup in the offing?