REUTERS/Nicky Loh
George Soros
Writing in The Guardian on Monday, the legendary macro trader said Britain currently risks subjecting itself to one of the worst one-day currency collapses in its history if it votes to leave the European Union.
"It is reasonable to assume, given the expectations implied by the market pricing at present, that after a Brexit vote the pound would fall by at least 15% and possibly more than 20%," Soros writes.
He added (emphasis mine):
"But I don't think the 1992 experience would be repeated. That devaluation was healthy because the government was relieved of its obligation to 'defend' an overvalued pound with damagingly high interest rates after the breakdown of the exchange rate mechanism. This time, a large devaluation would be much less benign than in 1992, for at least three reasons."
The 1992 incident Soros references, known in financial market history as "Black Wednesday," is the collapse in the value of the pound after the British government pulled the currency from the European Exchange Rate Mechanism (sort of the euro before the euro) due to the inability of the government to defend the pound's value against the Deutsche mark.
Soros was among the many traders who had placed massive bets the British pound would drop in value as he believed the government would eventually be forced to pull out of the ERM.
In other words: Soros knows this history.
Soros' three main points in Monday's piece are that:
- With interest rates at a record-low 0.50%, the Bank of England couldn't cut rates in response to a currency shock.
- The UK's current account deficit makes it dependent on foreign capital which could dry up in the event 'Leave' wins.
- A post-Brexit devaluation of the currency would be unlikely to benefit British manufacturing exports as the cheaper pound did in 1992.
On Thursday, Britons will head to the polls to vote in the referendum. Recent polling has shown the 'Remain' camp taking a lead against the 'Leave' camp, with the most recent poll on Monday night showing 'Remain' holding a 53-45 advantage over 'Leave.'
Following polling out over the weekend showing the spread between 'Remain' and 'Leave' narrowing, the pound rallied more than 2% against the dollar on Monday, one of its biggest one-day gains since the financial crisis.
And so markets are beginning to see polls and feel better about the prospects we'll wake up on Friday and things will be as they were in the European Union.
But Soros' warning is one that many in financial markets are likely to take very seriously.