In a post yesterday (see here) I said that one major issue for the United Kingdom, after the Brexit, would be the financing of its current account deficit. The deficit is close to 7% of the GDP and it’s funding is through inflows of capital on financial markets and on real assets (companies, real estate).
What has happened yesterday on property funds (see here) is a source of concern when we have the current account issue in mind. This could be the first step for difficulties.
Capital inflows to the UK may be discouraged by a poor outlook for the economy and by uncertainties on the economic and political process of the Brexit. This is why it will be difficult to finance the current account and the risk of its unsustainability that I mentioned in the post. At the top of that you can add outflows of capital from investors who have been hurt by a severe depreciation of the sterling and therefore of their assets (in euro) in an environment of poor economic prospects.
The risk therefore is to exit from these funds and to accelerate the depreciation of the sterling, creating a dynamic of run. The role of the Bank of England and of all the central banks will be to avoid a run by managing the post referendum situation.
