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London - Leaders of Britain’s splintered government sought to reassure investors they’ll be able to navigate the fallout from the stunning vote to quit the European Union as the pound extended its drop and international policy makers scrambled to respond.
After a weekend in which Prime Minister David Cameron’s administration appeared rudderless, Chancellor of the Exchequer George Osborne broke his silence before markets opened to declare “you should not underestimate our resolve” to limit an “inevitable adjustment” in the economy.
Boris Johnson, the pro-Brexit favorite to succeed Cameron, said “the negative consequences are being wildly overdone, and the upside is being ignored.”
The rhetoric brought policy makers no closer to clarifying just what the UK’s new relationship with the EU will look like and how bad the economy will suffer from the rupture. With Britain facing its greatest crisis in at least half a century, German Chancellor Angela Merkel and fellow European leaders today kick off a series of crisis talks.
What next?
They must decide how to treat Britain in the divorce talks and what steps to take to reinforce confidence in a bloc set to shrink with the departure of its second-biggest economy. Failure to deliver a strategy could prompt markets to force their hand - as they did after the collapse of Lehman Brothers Holdings and Greece’s debacle.
US Secretary of State John Kerry jets into Brussels and then London today to assess the situation first hand.
“At this point in time, policy makers, both in the UK and in Europe, are holding that level of uncertainty in their hands,” International Monetary Fund Managing Director Christine Lagarde said on Sunday. “How they come out in the next few days is going to really drive the direction in which risk will go.”
One sign voters elsewhere may already be favouring the safety of the status quo: Spain’s election on Sunday consolidated Prime Minister Mariano Rajoy’s position over insurgent populist parties.
Healing process
Cameron will address parliament today as the race to replace him nears, with Johnson and Home Secretary Theresa May among likely contenders. Johnson used his column in the Daily Telegraph to appeal to “Remain” voters, acknowledging “we must reach out, we must heal, we must build bridges – because it is clear that some have feelings of dismay, and of loss, and confusion.”
He also gave his backing to Bank of England Governor Mark Carney, who was criticized by the Brexit camp during the campaign for outlining the economic consequences of leaving.
Osborne, who had warned that a Brexit would trigger a “DIY recession” and require an emergency squeeze of fiscal policy, downplayed those warnings on Monday. Instead, he pledged to “do everything I can” to make the new order work and revealed other contingency plans are available to soothe the transition if needed. He said he will reveal his own career plans in coming days.
Sterling’s slump
The pound slumped 3.2% to $1.3245 at 12:15, bringing its decline to more than 11% since the referendum. It touched the lowest level since 1985. The FTSE 100 fell 1.3 percent and 10-year gilt yields fell below 1% for the first time on record. An index of UK banks fell 5.6%, extending Friday’s 10% drop.
In the days before the vote, billionaire George Soros had warned that the pound could slump more than 20 percent against the dollar because the true cost of Brexit was being underestimated. Still, Soros, whose 1992 bet against the pound made investing history, didn’t repeat the gamble while he was arguing for Britain to remain in the EU.
Economists are already downgrading their economic outlook. Goldman Sachs Group Inc. predicted a recession by early next year and interest rate cuts from the Bank of England.
EasyJet and Foxtons warned they may take a hit, and almost two-thirds of members of the Institute of Directors said the Brexit vote is negative for their business. EasyJet shares were down 18%, while Foxtons tumbled 22%.
The sense of chaos in British politics was deepened by the revolt in the opposition Labour Party. Leader Jeremy Corbyn vowed to stay on despite a string of resignations from his shadow cabinet and a refusal by his own deputy, Tom Watson, to publicly back him.
