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BREXIT

John Finn

Treasury Solutions

Content

1. The story so far….

2. The UK and EU

3. Process of exiting

4. Financial market trends

5. Short-term implications

6. Medium-term implications

7. Summary.

1. The story so far….

• Referendum set for June 23rd

• UK government endorsing a “Remain” position

• But number of defections, headed by Boris!

• Growing number of industry opponents also

• Polls are close to 50:50 with 15% undecided

• Paddy Power offering 2/5 to remain; 15/8 against.

2. The UK and EU

• EU accounts for 45% of UK goods exported and 53% of imports

• The EU exports 9% of its total exports to the UK

• 27% of UK food imported from EU

• Also materially dependant for other energy and financing of external deficit

• UK is party to 53 free trade deals negotiated by the EU.

3. Process of exiting

• Settle outstanding debts: 2017-2020 (2 year negotiations but…)

• Rights of UK citizens (and EU citizens in the UK?)

• Renationalise 12,295 EU regulations

• Renationalise EU directives (=15% of UK statute book)

• Renegotiate/reconfigure trade deals with 53 countries

• Air-transport – possible implications for 78 EU-negotiated agreements

• Replace EU enforcement agencies (e.g. competition, food standards).

Regulatory freedom??

• EMIR (reporting derivatives)

• CRD (insurance)

• Mifid (investment)

are all G20 requirements

• Financial services benefits from “equivalence” allowing UK companies to operate across

major financial centres. Changes in UK regulations could threaten this.

4. Financial Market Trends

• GBP has weakened to average EUR/GBP0.7736 this year

• 2015 was EUR/GBP0.7263. Loss of over €85k on GBP£1m

• Current spot is 10% weaker over Q1

• UK interest rates have eased

• Gilt rates holding up for now

• Forecasts that exit could drive GBP/USD (currently GBP/USD1.41) 10%-15% lower

• But “remain” vote could allow bounce back to GBP/USD1.55!

EUR/GBP

FX Options Pricing - EUR call/GBP put, ATM

March 11th April 14th

3 months 2.20% 2.95%

6 months 3.70% 3.72%

9 months 4.50% 4.42%

12 months 5.20% 5.10%

• Pricing supplied by Moneycorp

GBP 10-year gilt

5. Short-term Implications

• FX volatility. Options more volatile than 2008

• Gilt yields?

• UK FDI and GDP

• Possible adverse impact on UK visitors to Ireland?

• Brexit clauses now included in property deals.

6. Medium-term Implications

• Comparative economic data

• Alternative models?

• Finance

• Employees

• Others.

Brexit – Comparative Data

Ireland Eurozone EU UK

GDP (bn) €228 €13,410 €16,831 £2,135

Inflation 0.10% -0.20% 0.90% 0.30%

Jobless rate 8.80% 10.30% 8.90% 5.10%

Budget (deficit)/surplus -1.80% -2.20% -4.40%

Debt:GDP 98.40% 93.50% 87.20% 88.60%

Current Account 3.60% 3.70% -5.00%

Population 4.63m 338.34m 508m 64.77m

External Debt €164.8bn GB£348.8bn

Brexit- UK Budget Deficit

Brexit – Ireland Budget Deficit

Brexit – UK Trade Deficit

Brexit – Ireland Trade Surplus

Alternative models?

• Norway

• Access to single market, incorporate 75% of EU laws, make financial contribution

• Switzerland

• Bi laterals for goods but not services, make financial contribution but model under pressure

• WTO

• Will apply in absence of bilaterals, exports to EU would have to meet EU standards, but must apply same tariffs

to all 161 members imports unless trade agreements in place.

Finance

• Tax structure and financing

• Less banking choice for UK businesses

• EU Grants

• EIB loans?

• Cash Management and Pooling

• Impact on SSC?

• Approach to hedging risk (increased volatility.. and cost of doing same?)

Employees

• UK employees in EU?

• EU employees in UK?

• Impact on recognition of qualifications

• Brain drain from UK? (or Ireland to plug the gaps?)

Others

• Tax (especially VAT but also withholding taxes)

• Public Procurement

• Intellectual Property

• Data Protection.

7. Summary

• Potential for significant FX volatility in short-term

• Consequences of an EXIT vote in medium term is huge on so many fronts

• Makes no economic sense to vote to leave

• But this is a referendum – populist vote. Open to non-economic factors:

Terrorism

Media (right wing papers already pushing EXIT)

Hedge fund influence.

7. Summary

• Tourism is exposed

• If we sign bilaterals quickly, could we be their short-term safety valve?

• Impact on certain professions?

• Opportunity for Irish banks to grow in UK… less focus on Ireland?

• Impact on NI/border control, etc.?

• Start of EU fragmentation?

Email: johnfinn@treasurysolutions.ie

Website: www.treasurysolutions.ie

BREXIT

Presenter

John Finn

Treasury Solutions

14th April 2016