ECB pledges to support market if Britain quits EU

The European Central Bank would publicly pledge to backstop financial markets in tandem with the Bank of England should Britain vote to leave the EU, officials with knowledge of the matter told Reuters yesterday.

The preparations illustrate the heightened state of alert ahead of the June 23 referendum, which will help determine Britain’s future in trade and world affairs and also shape the EU.

The pound and euro have lost value on fears a Brexit could tip the 28-member bloc into recession.

Such an announcement from the ECB would come on June 24 if an early-morning result showed that British voters had chosen to leave the EU, according to the sources.

The aim is to underpin investor confidence across Europe and contain further market jitters.

“There will be a statement to do whatever it takes to maintain adequate market liquidity,” said one senior central bank official.

The ECB’s pledge would involve opening so-called swap lines with the Bank of England, allowing euros and sterling to be exchanged and effectively making unlimited funding in both currencies available to European banks, the sources said.

The ECB and Bank of England declined to comment.

The Bank of England said last month that possible “heightened uncertainty” due to the vote may make it harder for banks to tap their usual sources of foreign currency and that it would keep its operations, including swap lines, under review.

The ECB used similar arrangements with the US Federal Reserve to unlock extra dollars during the financial crisis and after the 9/11 attacks.

Providing extra funds to banks after a Brexit vote would ease pressure on them and reduce the potential for panic as financial markets digest the result on June 24, shortly before closing for the weekend.

The ECB is limited in what it can do, beyond releasing funds for banks.

Extending its money-printing programme, which has already saturated markets with more than €1tn and is gradually running out of bonds and securities to buy, would likely be contested by some countries such as Germany.

Such a move could only be considered if the market fallout from a Brexit weighed on the regional economy in the longer term.

Rising worries about a potential Brexit saw investors push safe-haven German Bund yields below zero for the first time yesterday and sent world stocks down for a fourth day running.

The pound remained fragile near a two-month low and world stocks slid for a fourth straight day, but it was the historic bond market moves for the Bund that captured best the mood of uncertainty.

Data showed that British inflation held steady in May against expectations for a small increase, as continued falls in clothing prices offset pressure from fuel prices.

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