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European finance - Financial institutions weigh their options after Brexit

Britain s decision to leave the EU is met with shock and uncertainty

Jun 26th 2016 | Business and finance

IN FINANCIAL circles, the shock at the news that Britain has voted to leave the

European Union can be felt well beyond the City of London. Across the Channel,

financiers from Frankfurt to Milan are expressing regret, sadness and disbelief

at news that very few had expected. Everyone feels disheartened and sad, says

Marie Owens Thomsen, chief economist of Indosuez Wealth Management, the private

banking arm of Credit Agricole, who fears dark days lie ahead for Britain,

including a worsening balance of payments and a recession. In addition to

Britain s fate, money-managers on the continent are worrying about volatility

(and buying opportunities), risks of contagion, what Brexit might mean for

monetary policy and the euro and how it will reshape Europe s

financial-services industry.

Of course our stock prices are not making us happy, says a spokesperson for

ING, a Dutch bank, after stockmarkets on both sides of the Channel slumped on

the news, Uncertainty and unrest are never good. Eric Chaney, head of the

research and investment strategy team at AXA IM (or Investment Managers), is

getting plenty of calls, especially from institutional investors and from Asia.

People want to know whether the City will atrophy; whether Italy will have a

debt crisis or itself leave the European Union; whether European banks might

enter another downward spiral; whether the euro is in peril again. So far, he

says, investors response has been rational: When you have existential

questions and no answers, of course you see a flight to safe assets.

The most pressing question is how closely Europe s fate is connected to Britain

s. Some see a buying opportunity for European assets and for the euro, which

they think are unfairly being dragged down by events in Britain. Any

correction outside of the British market might be the best buying opportunity

since 2009, says Ms Thomsen.

Others fear contagion, both in the short and in the long term. Spreads between

the bonds issued by Europe s most fiscally conservative governments and more

indebted Mediterranean spots have already widened sharply (by 0.5% between

Spain s and Germany s 10-year bonds when markets opened on Friday, for

example). BlackRock, a big American asset manager, says it predicts a weaker

euro over time, lower European growth, and thus a poorer outlook for European

assets. Christian Gattiker of Julius Baer, a Swiss bank, sighs and says he is

worried and closely monitoring the situation . Beyond the immediate volatility

in currencies, he particularly worries about what lies ahead for monetary

policy in Europe. Given the lengths the ECB has already had to resort to, he

worries that more upheaval might pave the way for helicopter money the printing

of cash to be given directly to governments or citizens, in an effort to stir

growth and inflation.

Finally, there s the question of whether firms will move out of London and

whether other European financial centres might benefit. France s Central Bank

governor, Francois Villeroy de Galhau, has already warned that banks in London

would lose their financial passport privileges once outside the EU, and

Eurogroup President, Jeroen Dijsselbloem, said restricted access to the single

market would be the price of leaving the EU.

While bank bosses are careful not to draw any hasty conclusions,

off-the-record, they admit that over time they may well reduce their presence

in London. ING s spokesperson says that his bank will follow its clients and if

they want to move to Paris or Frankfurt or Amsterdam it would be strange not

to follow. This will reshape the financial landscape in Europe for sure,

says Mr Gattiker. One concern is that there will be fierce competition among

several wannabe financial centres, leading to a diffuse and inefficient

financial system. With a contentious referendum on constitutional reform coming

up in October in Italy, and populists across the continent calling for their

own referendums on EU membership, the only thing that is certain is more

uncertainty. And whilst hedge-fund managers may like that, most institutional

investors do not.