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The Brexit Already Takes Its Toll

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The world rattled when news emerged overnight that the U.K. has decided to depart the European Union by a vote of 52 percent to 48 percent.

But apart from the poll results, the numbers flooding out of news stories on the Brexit paint a picture of confusion, uncertainty and debate. Multinational corporations fear the U.K. will have to renegotiate its trade contracts, one-by-one, with the rest of the EU member states and elsewhere. Companies doing business across borders were suddenly hit with a sterling decline, causing some firms to face more expensive purchases from outside the U.K. FinTech firms are struggling to manage rising FX hedging and exchange demand, while bank regulation is in limbo as financial institutions wait to see how their operations with the EU will move forward.

In short: The Brexit created a tsunami of market change, much of which the globe cannot predict with absolute certainty. This week's B2B Data Dive examines the statistics and data that have so far emerged less than a day after the U.K.'s fateful decision was made.

 

5.4 million SMEs in the U.K. will experience some type of impact from the Brexit, especially those doing international business. But how the Brexit's effects will play out is uncertain. For some small businesses, the Brexit is expected to benefit their companies. Reports Friday said some SMEs supported the departure from the European Union due to what they consider restrictive, bureaucratic red tape from the European Commission in Brussels that restricts the growth of their operations. Some small business owners interviewed by The Wall Street Journal said they are unfazed by what they expect to be short-term currency volatility and agree that the Brexit, long-term, will prove to be a positive development. Other small businesses speaking with the publication, however, said the Brexit and the sterling's decline will be an expensive hit for their operations thanks to orders made with cross-border vendors and potential tariff increases.

A 500 percent increase in currency transfers by U.K. SMEs and consumers is placing massive pressure on the financial services market, according to money transfer company HiFX. The firm's chief economist Chris Towner told reporters that one of its clients described the FX markets as "a bloodbath for the unprepared." The massive spike in currency exchanges – which flooded the markets overnight after the Brexit vote – came as the result of some SMEs transferring currency because they waited until the last minute to do so, and other British expats that are looking to take advantage of the sudden sterling drop, HiFX noted.

51 executives at top EU multinational corporations expressed disappointment over the outcome of the vote. The chairmen and chief executives are part of the European Round Table of Industrialists and include professionals from BP and Rolls-Royce, reports in the Financial Times said. The companies they represent are expected to face hurdles to their cross-border operations, from sourcing and sales to international staffing. But despite negative reactions, reports said many of these multinational corporations are still taking a wait-and-see approach to understand how a Brexit will impact their operations over the long term. Companies like BMW acknowledged that they will likely face renegotiations for contracts across EU borders and elsewhere, and are now focusing on ensuring that the government and the Bank of England work out a favorable game plan for U.K. corporations as the nation prepares to officially leave the EU.

The 7.7 percent plunge of the sterling against the U.S. dollar marked the steepest decline for the currency in more than three decades, analysts said. But currency valuations are fluctuating all across the globe, with India, Japan, the U.S. and elsewhere forced to handle the volatility, though some analysts believe international trade will only experience a short-term impact from the Brexit vote.

1,500 FinTech startups in the U.K. are already in crisis mode as the sterling, euro and currencies across the globe bob up and down. According to reports, the U.K. is home to about 6.8 percent of the world's FinTech startups. One of those is Currency Cloud, which handles foreign exchange trades for businesses. The company was hit with allegations that it had to suspend trading; the firm's chief marketing officer Todd Latham told the Financial Times, however, that it only partially suspended FX trading "to protect our customers" as it braced for currency volatility from the Brexit vote. Cross-border payments startup Azimo, however, claimed that Currency Cloud had to halt trading because Barclays postponed some of its own FX operations. The confusion and interruption to FX services is likely to hit other FinTech companies operating in the foreign-exchange space, while the Brexit could heighten demand for FX hedging services by these firms.

A 1 percent economic growth rate for the euro area, projected by economists at Credit Suisse, represents the fallout of the Brexit as analysts had previously projected economy growth to stand at 2 percent by the end of 2017. Meanwhile, analysts also said that they are expecting the U.K. to endure a recession. There is a lot the U.K. and eurozone have to figure out, from how to handle currency volatility to whether trade negotiations between individual EU member states and the U.K. have to be redone, one-by-one. But Credit Suisse is convinced that, when all is said and done this year, the eurozone's economy will not be as strong as it might have been.

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