Ripples of Brexit risks become apparent

Brexit is no more a domestic issue as its impact spreads eastward, where bonds from Poland, Hungary and Romania, underperform most of their emerging peers. But the “leave” campaign maintains reports being made about potential negative economic impacts “are part of scaremongering”. Yet, many strategists have drawn pessimistic scenario towards eastern Europe as Britain’s departure threatens billions of euros in EU funding that poorer countries use to build infrastructure. The exit could potentially limit funds sent home by workers in the UK as migration becomes restricted.
According to figures, Poland, Hungary, Romania and Czech Republic rely on EU subsidies to underpin growth. With its $545 billion economy and 38 million people, Poland is scheduled to receive 114.7 billion euros ($130 billion) of funds between 2014 and 2020. The UK was the third-largest net contributor in 2014, adding 7.1 billion euros to the budget, according to data from the Treasury in London.
Sensing the risk posed by the Brexit, Commerzbank AG downgraded bonds from Poland, Hungary and Croatia this week, saying the countries are most vulnerable to Brexit risks. Ahead of June 23, markets will trade cautiously to ascertain first where the tide goes. In general, Brexit poses risks because of the negative implications this could have for flows from the EU budget and also net remittances.
Even before the Britons vote, Poland’s currency has been the worst-performer among major emerging markets this month, sliding 3.7 percent against the euro. Zloty-denominated sovereign bonds handed investors losses of 4.5 percent in dollar terms in April, the most among 31 nations in the Bloomberg Emerging Market Local Sovereign Index.
Meanwhile, Romanian and Hungarian notes have also declined, compared with gains for Turkey and Russia. Making the case for an exit, former UK finance ministers Nigel Lawson and Norman Lamont and the founder and managing partner of Better Capital, Jon Moulton, argued freedom from EU regulation would be a risk worth taking and prove beneficial in the longer-term.
They argued Prime Minister David Cameron “has decided to play with this fantastic great European dream just for internal purposes and a career path”.
Ahead of the referendum, Britain’s Conservative cabinet has split over whether Britain should stay in the EU and polls show swathes of the electorate remain undecided. As the campaign gets tougher, the camps campaigning for the UK to leave have accused the government of ‘scaremongering”, with a group of eight pro-Brexit economists on Thursday attacking a Treasury analysis of the risks of exit published earlier this month as a “misleading piece of propaganda”.
Recently, US President Barack Obama joined in the chorus of warnings about the potential fallout from an exit — a move decried by the “leave” campaign who saw it an external intereference.
The Number Cruncher Politics Referendum Forecast, generated by political blogger Matt Singh, shows the probability of Britain voting to leave the EU has risen to 22 percent from 20 percent this week.
For the “leave” campaign, the exit from the EU could allow them to get a better deal than Switzerland when it comes to financial services, as they cite financial weight of the City of London. But such a bitter divorce can make even make talks exceedingly difficult. The UK’s renegotiation with the EU will be very difficult at a time when the bloc is already unhappy with its relationship with Switzerland.
To strengthen its position, “Remain” side in the UK government released a 200-page Treasury analysis that warned the economy would be permanently damaged by a so-called Brexit. This has been voiced by London’s financiers and business executives who warned that a vote to leave the EU will prompt
poverseas banks to move jobs elsewhere.
Leaving the EU would cost the country access to the single market and the opportunity to shape decisions within the bloc.