Britain’s vote to leave the European Union sent new shockwaves through financial markets, with the pound falling despite the country’s leaders’ attempts to ease the political and economic turmoil it has unleashed.
Finance minister George Osborne said on Monday the British economy was strong enough to cope with the volatility caused by Thursday’s referendum, the biggest blow since World War Two to the European goal of forging greater unity.
But his words failed to halt the fall of sterling, which later sank to its lowest level against the U.S. currency for 31 years, continuing the slide that began last week when Britons confounded investors’ expectations by voting to end 43 years of EU membership.
European bank shares had their worst two-day fall on record and world stocks, as measured by MSCI .MIWD00000PUS were on track for their worst two-day fall since the aftermath of the collapse of Lehman Brothers in late 2008. With the ruling Conservatives looking for a new leader after Prime Minister David Cameron’s resignation on Friday and lawmakers from the opposition Labour party stepping up a rebellion against their leader, Britain sank deeper into political and economic chaos.
“There’s no political leadership in the UK right when markets need the reassurance of direction,” said Luke Hickmore of Aberdeen Asset Management, expressing the view of many in the City of London financial centre.
Cameron has promised to stay on until October as a caretaker, and says his successor should trigger the formal process of leaving the EU. His Conservative Party in parliament recommended choosing a successor by early September.
The prime minister sought to calm fears over the fallout of the referendum and said parliament should not try to block Britain’s departure. A majority of parliamentarians, like him, had argued that Britain should stay in the EU.
“I am clear, and the cabinet agreed this morning, that the decision must be accepted,” Cameron told parliament, which also faces a public petition for a new referendum.
But his refusal to start formal moves immediately to pull the country out of the EU has prompted many European leaders to demand quicker action by Britain, the EU’s second largest economy after Germany, to leave the 28-country bloc.
“It should be implemented quickly. We cannot remain in an uncertain and indefinite situation,” French finance minister Michel Sapin said on France 2 television.
Guenther Oettinger, a German member of the EU’s executive European Commission, said Cameron and his party should not risk causing damage at home and abroad by waiting until October.
“Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets,” he told Deutschlandfunk radio.
MERKEL HAS “NO BRAKE, NO ACCELERATOR”
While European leaders would like swift negotiations to end the uncertainty, which is fuelling euro sceptic forces in their own countries, they say they cannot begin until Britain formally notifies the EU it is planning to exit.
That makes the escalating turmoil in both Britain’s major political parties a particular concern to them and the wider world.
The leaders of France, Germany and Italy met in Berlin on Monday to plan their next moves and said Europe needed to respond to its people’s concerns by setting clear goals to improve security, the economy and prospects for young people.
German Chancellor Angela Merkel, who has appeared to take a softer line on Britain’s decision than some European leaders, said she had “neither a brake nor an accelerator” to control events, adding: “We just don’t want an impasse”.
Making clear the exit negotiations would not be easy, Volker Kauder, who leads Merkel’s conservatives in parliament, told ARD television: “There will be no special treatment, there will be no gifts.”
The shockwaves are being felt across the globe at a time when economies are still fragile from the 2008 economic crisis, interest rates are close to zero and central banks have fewer tools than normal to revive demand if countries enter recession.
Financial markets misjudged the referendum, betting on the status quo despite abundant signs that the vote would be close.
When reality dawned, the reaction was brutal. Sterling fell as much as 11 percent against the dollar on Friday for its worst day in modern history, while $2.8 trillion was wiped off the value of world stocks – the biggest daily loss ever.
That trumped even the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor’s Dow Jones Indices.
By Monday afternoon, sterling had shed around 3.6 percent against the dollar to $1.3209 despite an attempt by Osborne to ease concerns by saying he was working closely with the Bank of England and officials in other leading economies.
“Our economy is about as strong as it could be to confront the challenge our country now faces,” he told reporters. “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.”
U.S. Treasury Secretary Jack Lew also tried to restore calm, telling CNBC television it had been “an orderly impact so far” though he later added: “We have resilience built into our economy, but we’re not cut off from the world.”
Visiting Brussels, U.S. Secretary of State John Kerry said it was important that “nobody loses their head” as the EU and Britain deal with the fallout from the referendum.
Later, in London, he urged both sides to be driven by common sense rather than a desire to get even, saying the impact on the U.S. economy would depend on how the negotiations go.
“PENSIONS ARE SAFE”
The vote to leave the EU has increased the likelihood of Scotland holding a second referendum on independence, after voters there strongly backed remaining in the EU.
Boris Johnson, a leading proponent of a Brexit and likely contender to replace Cameron, praised Osborne for saying “some reassuring things to the markets”.
The former London mayor said it was now clear “people’s pensions are safe, the pound is stable, markets are stable. I think that is all very good news.”
Financial markets took a different view. The yield on British 10-year government bonds fell below 1 percent for the first time as investors bet the Brexit vote would trigger a Bank of England interest rate cut aimed at steadying the economy.
Many economists have cut economic growth forecasts for Britain, with Goldman Sachs expecting a mild recession within a year. The risks affect economies far beyond Britain.
“Against the backdrop of globalisation, it’s impossible for each country to talk about its own development discarding the world economic environment,” Chinese Premier Li Keqiang told the World Economic Forum in the city of Tianjin.
Japanese Prime Minister Shinzo Abe instructed his finance minister to watch currency markets “ever more closely” and take steps if necessary.
Johnson tried to calm fears over Britain’s future trade ties with the EU by writing in the Daily Telegraph newspaper that there would be continued free trade and access to the single market, although EU leaders say that is not a given.
He also suggested Britain would not have to accept free movement of workers, aware that many Britons voted to leave due to concerns over immigration. However, single market rules stipulate that countries must accept free movement of people as well as goods.
Johnson is expected to declare soon that he is running to lead the Conservatives, who have been divided for decades between pro- and anti-EU factions.
Divisions within the opposition are also deep. A wave of Labour lawmakers resigned from leader Jeremy Corbyn’s team on Monday, adding to the 11 senior figures who quit on Sunday, saying his campaign to keep Britain in the EU was half-hearted.
Corbyn, a left-winger who has strong support among ordinary party members, has said he is not stepping down.
Discontent with the political establishment in general and the Conservatives in particular was a factor behind the vote to leave, although many Brexit backers focused on immigration, complaining too many migrants had arrived from eastern Europe.
Police said offensive leaflets targeting Poles had been distributed in Huntingdon, central England, and graffiti had been daubed on a Polish cultural centre in central London on Sunday, three days after the vote.
The Polish embassy in London said it was shocked by the “xenophobic abuse” aimed at the Polish community and others.