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Will Brexit precipitate a new banking crisis?

Despite warnings of economic turmoil, the Brits have voted for Brexit. It's increasing the risk of recession of an already fragile global economy. So what does this mean for fleet managers?

On Thursday 23 June, the Brits voted themselves out of the European Union. Experts had warned against the negative consequences of a Brexit. Some economists even predicted that it could lead to a recession with a magnitude as the one that followed the collapse of Lehman Brothers in 2008. That Great Recession brought the international financial system on the verge of a meltdown. A worldwide economic crisis followed the financial one. The world is still recovering from it, especially in Europe and Japan. Yet despite those warnings, the UK chose Brexit. So Brexit we will have.

Initial panic
The financial markets didn't really expected the referendum to result in a vote for Brexit, so they were as surprised and shocked as everybody else. Their initial panic resulted in big losses, but both the panic and the losses soon dissipated. A swift, Lehman-like collapse has not materialised. But that doesn't mean Brexit won't have far-reaching consequences. The outcome of the referendum added a severe shock to an already shaky global economy, as it faces a wide range of serious challenges. Even if there was no immediate collapse, the consequences are highly likely to be highly negative.

But let's try to figure out what Brexit means for the UK itself. First and foremost, the fear is that it may cause a recession, for it is very unrealistic to presume that the Brits will weather this storm without suffering some serious economic hardship.

Bank of England
The Bank of England is bracing for that storm, and is preparing to lower the interest rate even further. It is hoped that this will inoculate the UK against the worst of the economic turbulence, but the reality is that no one knows what Brexit means exactly – and it will take months before it comes into focus. Some economists still fear for a copy of the Great Recession, introduced by a slow-motion collapse instead of a rapid one. 

Nor does it look like Europe will be spared the consequences of Brexit, one of which is that the weaknesses of the European banking system have once again become all too apparent. In fact, the trouble dates from the first weeks of 2016, when Deutsche Bank's share price took a sudden nosedive. In the intervening months, Germany's biggest bank has continued on a slow decline. Its share prices are at record lows. Analysts fear the bank's capital base is too narrow, considering its extensive exposure in derivatives. When Deutsche Bank gets into trouble, it will automatically endanger the entire financial system, for Deutsche Bank is, like others before it, too big to fail.

Pivotal question
But Deutsche Bank is not the only problem child in the financial world. Italy has sounded all hands on deck to keep on top of the problems in its financial sector. The Itallian government wants to lend a helping hand to its country's banks, but that intent does not find favour with the European Union. Should a financial crisis erupt in Italy, it is likely to spread to other European countries. All hell could break loose.

The pivotal question is: Who – or what – is to blame for the mess we're in? The answer is not very difficult. After the previous crisis, Europe prevaricated, and did not fundamentally deal with the causes of the crisis. The continent's central bankers lived in hope that the problems would resolve themselves. But it is foolhardy to think that they will. An additional problem: the central banks have lost a lot of their firepower. Most of the means available to them have been used to crank up economic growth. Should a new crisis erupt, they're very badly equipped to fight the outbreak.

New crisis
So how big is the risk that Brexit will precipitate a new financial crisis, followed by an economic recession? Fairly big, most economists agree, unless there's a swift solution for troubled financial institutions like Deutsche Bank. Brexit has pushed an already fragile global economy closer to the brink. Even the United States now has a much larger risk of a recession. Fleet managers would be wise to include the possibility of a recession in their budgets.

08/07/2016  |  Jos Sterk

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