Britain’s vote to leave the EU could be significantly negative for the eurozone, dampening a growth outlook that is already facing headwinds, the European Central Bank said in the minutes of its June 2 meeting, held before the referendum.
Growth is being hampered by a weak external environment, particularly in emerging markets, and continued deleveraging by eurozone companies, and risks remain tilted to the downside, policymakers concluded.
“In the event that the UK voted to leave, i.e. a ‘Brexit’, there could be significant, although difficult to anticipate, negative spillovers to the eurozone via a number of channels, including trade and the financial markets,” the ECB said.
Britons voted to leave the EU in a June 23 referendum.
The ECB said time would be needed to see the full effect of its already unveiled but not yet implemented policy-easing measures, particularly its corporate bond buys and a fresh round of cheap loans.
Its cautious tone was similar to that of the Federal Reserve, which said on Wednesday that it would keep interest rates firmly on hold until it got a handle on the consequences of Britain’s vote to leave the EU.
For the ECB, one of the most pressing issues may be the investor flight to top-rated government debt seen after the referendum, which reduces the availability of bonds to purchase as part of its €1.74 trillion quantitative easing scheme.
Nearly a third of eurozone government bonds are no longer eligible for the asset- buying scheme because they yield less than the bank’s -0.4 per cent deposit rate, Tradeweb data showed yesterday.
The ECB said a remark was made at the June meeting that markets see a future challenge in sourcing sufficient volumes of debt to buy, possibly leading to increased price volatility.
Although the ECB can substitute assets if it cannot buy enough government debt, investors remained closely tied to specific market segments, so that the actual composition of purchases still mattered, the ECB added.
Some analysts predict the bank will not have enough German, Irish and Portuguese bonds to buy due to its self-imposed limits, forcing the ECB to tweak some of its rules if it wants to maintain monthly purchases at €80 billion per month until March, when the scheme is due to run out.