PARIS / Bloomberg
The consequences of a â€œleaveâ€ vote in the U.K.â€™s June 23 referendum on its European Union membership may spread beyond Britainâ€™s shores, according to Societe Generale SA.
While the U.K.â€™s assets will depreciate should the nation vote to sever a more-than-40-year-alliance with the continent, its close links to the rest of the blocâ€™s financial entities also leave the EU vulnerable. The EUâ€™s ratings could suffer and the European Investment Bank, which helps provide financing for projects in the region, is â€œparticularly at riskâ€ in the event of a â€œBrexit,â€ Cristina Costa, a Paris-based analyst at SocGen wrote in a note to clients.
The EIB would have to endure both a â€œdowngrade and spread widening,â€ Costa wrote. With the U.K. being one of the bankâ€™s highest-rated countries, contributing as much as 16.1 percent to its capital, an exit â€œcould weaken the profile of the bankâ€ as it will decrease the share of contributions from high-rated countries to 59.6 percent from 66.1 percent, she wrote. The EIB has the highest credit grade at Fitch Ratings, Moodyâ€™s Investors Service and Standard & Poorâ€™s.
The EU could face a single-level downgrade while â€œBrexitâ€ might also mar the ability of the EIBâ€™s â€œremaining shareholders to provide support, if funding conditions were to worsen significantly,â€ according to Costa.
Repercussions of the U.K. leaving the EU may be difficult to contain. Strategists at HSBC Holdings Plc, Standard Bank Group Ltd and Mizuho Bank Ltd. all cited â€œBrexitâ€ concerns as weighing on the euro.
Mounting uncertainty around the vote has not only weakened the pound against its Group-of-10 peers this year, but it also threatens to drag Europeâ€™s shared currency down. The U.K.â€™s exit would call into question the whole European project, which champions integration within the region, Frederik Ducrozet, an economist at Banque Pictet & Cie SA in Geneva, said last month.
Similarly, it could make it increasingly difficult for the European Central Bankâ€™s quantitative-easing program to shield the regionâ€™s debt.
SocGen estimates Britain leaving the EU will trigger at least five or 10 basis points of spread widening from current levels between EIB bond yields and those of Germanyâ€™s state-owned development bank KfW, which is considered to be Europeâ€™s benchmark agency debt. Both entitiesâ€™ debt is currently supported via the ECBâ€™s public-sector purchase program, which is set to end in March 2017.
Britainâ€™s exit could take away about 2.4 percent of the EUâ€™s overall budget, if the U.K. adopted a status similar to Switzerland by becoming a member of the European Free Trade Association, SocGen economists calculated. This â€œlimitedâ€ loss â€œcould be fairly easily absorbed by the remaining EU members,â€ the French bank said.