Brexit was a shower, a deluge is on the way

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Brexit was a shower, a deluge is on the way

Last Friday's force 12 financial hurricane had been downgraded to a storm in a rather British tea cup by Thursday as primary capital markets dusted themselves off and reopened with deals from across the spectrum. But don't relax yet — the UK’s EU vote may prove the catalyst for a host of horrors over the summer.

The UK will be a full EU member for at least two years. Likely any divorce deal will look a lot like its current status, only on slightly worse terms. And of course, London will not lose its status as Europe’s chief finance hub overnight — even HSBC has said it won’t be off to Hong Kong this time.

So was that a fuss about nothing? Don’t be so sure. Brexit will be grim for the UK, but it also weakens Europe regardless of what those at the core of its institutions would have you believe. The UK accounts for almost 20% of the EU's nominal GDP. Put it this way, would the US be stronger without New York?

Money will retreat from Europe back to the US and Asia just like it did during the euro debt crisis. Within Europe, nationalists and separatists just received a huge fillip to their cause.

Somewhere down the line the shakier banks in Italy and Germany will start to look vulnerable as confidence inevitably drains from the system and share prices plunge lower. 

Although liquidity will not be a problem this time thanks to the ECB, governments will start to worry about falling capitalisations of national champions. State aid before the summer is out is a strong possibility.

Despite this week’s rebound, we cannot fathom yet the full consequences of what the UK has chosen. Don't pack the suitcase quite yet — the European Union and its markets will come under threat.

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