Britain’s vote to leave the European Union sent new shockwaves through financial markets on Monday, with the pound falling despite government attempts to ease the political and economic turmoil that has been unleashed.
Finance minister George Osborne said the British economy was strong enough to cope with the volatility caused by Thursday’s referendum, the biggest blow since World War Two to the European goal of forging greater unity.
His words failed to stop sterling sinking to its lowest level against the U.S. dollar for 31 years, continuing the slide that began last week when Britons confounded investors’ expectations by voting to end 43 years of EU membership.
European bank shares had their worst two-day fall on record and world stocks as measured by MSCI were on track for their worst two-day fall since the aftermath of the collapse of Lehman Brothers in late 2008.
Ratings agency Standard & Poor’s stripped Britain of its last remaining top-notch credit rating on Monday, warning that more downgrades could follow.
With the ruling Conservatives looking for a new leader after Prime Minister David Cameron’s resignation on Friday and lawmakers from the opposition Labour party stepping up a rebellion against their leader, Britain sank deeper into political and economic chaos.
“There’s no political leadership in the UK right when markets need the reassurance of direction,” said Luke Hickmore of Aberdeen Asset Management, expressing the view of many in the City of London financial centre.
Cameron says he will stay on until October as a caretaker and that his successor should trigger the formal process of leaving the EU. His Conservative Party in parliament recommended choosing a successor by early September.
“DECISION MUST BE ACCEPTED”
The prime minister sought to calm fears over the fallout of the referendum and said parliament should not try to block Britain’s departure. A majority of parliamentarians, like him, had argued that Britain should stay in the EU.
“I am clear, and the cabinet agreed this morning, that the decision must be accepted,” Cameron told parliament, which also faces a public petition for a new referendum.
But his refusal to start formal moves to pull the country out of the EU has prompted many European leaders to demand quicker action by Britain, the EU’s second largest economy after Germany, to leave the 28-country bloc.
“It should be implemented quickly. We cannot remain in an uncertain and indefinite situation,” French Finance Minister Michel Sapin said on France 2 television.
Guenther Oettinger, German member of the EU’s executive European Commission, said delay would hurt Europe as well as Britain. “Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets,” he told Deutschlandfunk radio.
Cameron heads to Brussels on Tuesday for a grim EU summit to brief the other 27 leaders over dinner on his failure to win a referendum that he promised them he could win after they cut him a deal to curb immigration.
Diplomats say the 27 are resigned to waiting perhaps three months to start the exit process.
They rule out negotiations, even informal exploratory talks, on what kind of future relationship the bloc will have a country that is now its second biggest economy and one of its main global and military powers. But diplomats expect Cameron to set some kind of tone for what he thinks his successor may seek, and British officials will be probing for a sense of what others may offer.
Cameron will leave Brussels after dinner, while the other 27 will meet for the first time without him on Wednesday morning to plan their next moves. They are likely to stress a willingness to negotiate, but only after London binds itself to a tight two-year exit timetable.
MERKEL HAS “NO BRAKE, NO ACCELERATOR”
The leaders of France, Germany and Italy met in Berlin on Monday and said Europe needed to respond to its people’s concerns by setting clear goals to improve security, the economy and prospects for young people.
German Chancellor Angela Merkel, who has appeared to take a softer line on Britain’s decision than some European leaders, said she had “neither a brake nor an accelerator” to control events, adding: “We just don’t want an impasse.”
Volker Kauder, who leads Merkel’s conservatives in parliament, told ARD television: “There will be no special treatment, there will be no gifts.”
The shockwaves are being felt across the globe at a time when economies are still fragile from the 2008 economic crisis, interest rates are close to zero and central banks have fewer tools than normal to revive demand if countries enter recession.
Financial markets misjudged the referendum, betting on the status quo despite abundant signs that the vote would be close.
When reality dawned, the reaction was brutal. Sterling fell as much as 11 percent against the dollar on Friday for its worst day in modern history, while $2.8 trillion was wiped off the value of world stocks – the biggest daily loss ever.
Sterling hit $1.3122 on Monday, its lowest level since mid-1985. The euro also remained weak, hitting a session low of $1.0971.
U.S. stocks were sharply lower, following European markets, pulled down by banking stocks amid uncertainty over London’s future as the region’s financial capital. Safe-haven bond and gold prices rose.
“Our economy is about as strong as it could be to confront the challenge our country now faces,” Osborne told reporters earlier.
“It is inevitable after Thursday’s vote that Britain’s economy is going to have to adjust to the new situation we find ourselves in.”
U.S. Treasury Secretary Jack Lew also tried to restore calm, telling CNBC television it had been “an orderly impact so far” though he later added: “We have resilience built into our economy, but we’re not cut off from the world.”
Visiting Brussels, U.S. Secretary of State John Kerry said it was important that “nobody loses their head” as the EU and Britain deal with the fallout from the referendum.
Later, in London, he urged both sides to be driven by common sense rather than a desire to get even, saying the impact on the U.S. economy would depend on how the negotiations go.
“PENSIONS ARE SAFE”
The vote to leave the EU has increased the likelihood of Scotland holding a second referendum on independence, after voters there strongly backed remaining in the EU.
Boris Johnson, a leading proponent of Brexit and the frontrunner to replace Cameron, praised Osborne for saying “some reassuring things to the markets”.
The former London mayor said it was now clear that “people’s pensions are safe, the pound is stable, markets are stable. I think that is all very good news.”
Sky News said work and pensions minister Stephen Crabb was also considering a bid for the leadership, with business secretary Sajid Javid seeking to become finance minister. Both were in favour of staying in the EU.
The editor of the Spectator magazine tweeted that Health Secretary Jeremy Hunt was also “highly likely” to launch a bid.
The yield on British 10-year government bonds fell below 1 percent for the first time as investors bet the Brexit vote would trigger a Bank of England interest rate cut aimed at steadying the economy.
Many economists have cut economic growth forecasts for Britain, with Goldman Sachs expecting a mild recession within a year. The risks affect economies far beyond Britain.
“Against the backdrop of globalisation, it’s impossible for each country to talk about its own development discarding the world economic environment,” Chinese Premier Li Keqiang told the World Economic Forum in the city of Tianjin.
Japanese Prime Minister Shinzo Abe instructed his finance minister to watch currency markets “ever more closely” and take steps if necessary.
Johnson tried to calm fears over Britain’s future trade ties with the EU by writing in the Daily Telegraph newspaper that there would be continued free trade and access to the single market, although EU leaders say that is not a given.
He also suggested Britain would not have to accept free movement of workers, aware that many voters chose “leave” due to concerns over immigration. However, single market rules say countries must accept free movement of people as well as goods.
While the question of whether to leave the EU has split the ruling Conservative party, divisions within the opposition are also deep. A wave of Labour lawmakers resigned from leader Jeremy Corbyn’s team on Monday, adding to the 11 senior figures who quit on Sunday, saying his campaign to keep Britain in the EU was half-hearted.
Corbyn, a left-winger who has strong support among ordinary party members, has said he is not stepping down.
Discontent with the political establishment in general and the Conservatives in particular was a factor behind the vote to leave, although many Brexit backers focused on immigration, complaining too many migrants had arrived from eastern Europe.
Police said offensive leaflets targeting Poles had been distributed in Huntingdon, central England, and graffiti had been daubed on a Polish cultural centre in central London on Sunday, three days after the vote.
The Polish embassy in London said it was shocked by the “xenophobic abuse” aimed at the Polish community and others.
“Let’s remember these people have come here and made a wonderful contribution to our country. And we will not stand for hate crime or these kinds of attacks,” Cameron told parliament. “They must be stamped out.”