Danish investors and pension funds may start repatriating billions of euro in assets to protect themselves from currency losses amid concern that a British exit from the EU will send markets into turmoil.
Jyske Bank estimates Danish pension funds alone have about 1 trillion kroner (€135bn) in offshore positions that aren’t hedged, leaving them exposed if investors hoard safe-haven assets such as kroner in the event of a so-called Brexit.
“In an extreme case, that money will be repatriated or hedged against currency risks should there be financial uncertainty, for example, in the event of a Brexit,” according to Niels Roenholt, the bank’s chief economist.
Jyske Bank says a Brexit probably won’t trigger a repeat of the currency market turmoil that followed Switzerland’s decision to abandon its ties to the euro in January 2015.
Back then, speculators quickly turned their sights on Denmark amid conjecture its euro peg would also fail. The Danes prevailed, though only after the central bank cut its main rate well below zero and almost doubled foreign reserves to about 40% of GDP.
This time, “even a minor amount of pressure will lead to currency interventions and a rate cut” in Denmark, Mr Roenholt said. Denmark’s substantial current account surplus already puts pressure on its euro peg.
“But if Danish investors with large offshore positions today should decide to repatriate just a small part of that money, or hedge it, in a situation in which there’s turmoil, that would be enough to add to pressure on the peg,” Mr Roenholt said. Jyske Bank puts the probability of a Brexit at 30%.
Should Britain vote to remain, “it will likely trigger a relief rally”, according to Nordea bank. That would support the pound and “risky assets,” a team of analysts at the bank said.
Meanwhile, the OECD yesterday cut its UK growth forecast and repeated its warnings about the economic damage a vote to leave the EU would cause.
The OECD’s latest intervention in the intense UK political debate echoes its warnings in an April report, when it was criticised by pro-Brexit campaigners.
The Paris-based group said uncertainty surrounding the June 23 referendum has already undermined growth and cut its 2016 forecast to 1.7% from 2.1%.
“The outcome of the referendum is a major risk for the economy,” the OECD said in its ‘Economic Outlook’.
“A vote for Brexit would heighten uncertainty, raise the cost of finance and hamper investment,” the think tank said.
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