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Brexit vote 'raises risks to US financial stability'

Published 25/07/2016

Distress in Britain could threaten US financial stability, a report warned
Distress in Britain could threaten US financial stability, a report warned

Britain's decision to quit the European Union has elevated the risks to US financial stability, though they remain moderate, according to US Treasury Department experts.

The report issued by the Treasury's Office of Financial Research (OFR) comes a day after global finance officials promised to protect the world economy from the shockwaves of Britain's EU referendum last month and to boost sluggish growth.

The vote, which surprised financial markets and was a "negative shock" to investor confidence, brings in months or years of uncertainty over British finance, trade and investment, the OFR report says.

Because Britain's economy and financial system are so closely connected with the US and the rest of Europe, distress in Britain could threaten US financial stability, it warned.

"Brexit was a shock," OFR director Richard Berner told reporters.

"It creates uncertainty both in financial markets and among business people. There's still uncertainty to come," Mr Berner said.

Financial markets, especially the US stock market, were rocked by the June 23 vote in Britain. Markets later recovered and US stocks mounted a robust rally in recent weeks.

But the new report warns that markets may be underestimating the risks ahead.

In a "severe adverse scenario", shocks from Britain and Europe would threaten the stability of the US financial system through disruptions in trade, financial connections among the countries and in investor confidence, the report says.

Officials from the Group of 20 major economies - including the US, China, Britain and Germany - met in Beijing over the weekend against a backdrop of a weak global recovery that was rattled by the Brexit vote and trade tension over Chinese exports of low-priced steel.

US Treasury secretary Jacob Lew said ahead of the meeting that it was not the right time for co-ordinated action similar to that in 2008-09 following the global crisis because economies face different conditions.

"Overall, the general sense was that the outlook remains uncertain," Mr Lew said in a statement.

"There is now broad consensus that what the global economy needs is growth - not austerity - and the discussions here have focused on how best to achieve that outcome."

Mr Lew met soon after the EU exit vote with Britain's new Chancellor, Philip Hammond. He has said that the recent market turmoil sparked by the British vote was within bounds and does not have the makings of another financial crisis.

AP

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