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Damir Kaletovic

Damir Kaletovic

Writer, Safehaven.com

Damir Kaletovic is an award-winning investigative journalist, documentary filmmaker and expert on Southeastern Europe whose work appears on behalf of Safehaven.com.

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Brexit’s $34 Trillion Problem

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The UK is only nine months away from Brexit, and the specter of an exit with no deals in place with the European Union is not only leading to reduced investments and threats of pullouts by big players, but regulators are saying the country’s banks are woefully unprepared.

And they’re not just woefully unprepared—it’s much worse than that.

The Bank of England warns that the UK is looking at an unprecedented financial crunch by next Spring, sounding alarms bells over trillions of pounds of derivatives it says will cease to function.

They blame the EU itself, saying that British banks could handle a Brexit—hard or soft—because they’ve got plenty of capital, but European authorities have failed on their end.

At issue is $34 trillion of derivative contracts, underpinning the financial system, which could become unserviceable when the UK exits the EU formally in March next year.

Why is the EU to blame, then?

According to the Bank of England, because the some $34 trillion in derivatives rely on cross-border co-operation, they will stop operating effectively because the European Commission hasn’t committed to an implementation period for finance.

In other words, all of these contracts of trade between Britain and the rest of Europe could become void because firms will no longer have the authority to service them.

Nothing like this has ever happened in the history of finance, so the specter of chaos is that much more frightening.

And not only are there $34 trillion in derivatives at stake, but 36 million insurance policies that could destabilize that industry.

There is no deal in place for protection of any kind, and derivatives contracts give banks and corporations protection from interest rate hikes.

This is a war of words right now between EU and UK banking authorities. While the Bank of England is placing the blame directly on the EU, the EU accused the UK banking sector earlier this week of dragging its feet on Brexit.

But while the UK has agreed to allow European firms to service financial contracts in Britain post-Brexit, the EU has not taken any steps to do the same for the British. Related: Trade War Or Not, These Chinese Tech Unicorns Are Going Public

In the meantime, London risks losing its status as Europe’s financial hub, with Paris, Frankfurt and Dublin eyeing the mouthwatering possibilities for themselves. British HSBC is already eyeing Paris post-Brexit, while Barclays is looking at Dublin for its new European hub and the Royal Bank of Scotland is talking about Amsterdam.

Confidence is at a low point now.

Britain has already started counting its losses, with the Bank of England estimating the cost to the economy at £40 billion, or 2 percent of the economy--and still counting. And the pain could get much worse all around.

Giant Airbus, the world’s largest plane-maker, has threatened to leave the UK if no Brexit deal is in place.

BMW has said that while it has no intention of withdrawing its manufacturing operations from the UK, Brexit customs costs would push up prices and the company would be forced to invest in new customs systems by late summer if there is no clarity on the UK trading relationship with the EU by then.

By Damir Kaletovic for Safehaven.com

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