A look at the repercussions of Britain’s possible exit from the European Union

BREXIT

BREXIT

By Kate Holton

A bove a factory floor of machines carving metal to within a millionth of a metre, Stephen Cheetham

is preparing his company for the unknown: a British exit from the European Union. Since the government announced a referendum on Britain's future in Europe, Cheetham has deferred investment decisions, put off expensive hiring and even bought equipment with his own money to avoid straining the balance sheet. The aim is to prepare his company, which makes parts for first-class airline seats and intricate scientific equipment, for what he fears will be a slump in business if Britain votes to leave the world's biggest trading bloc. "It is extremely difficult to prepare for and it worries me witless," said the owner of PK Engineering. "But our

disaster plan is very clear: if all the kit is paid for, we hang on to it and we ditch everybody apart from the core." Britain's big listed companies have appointed lawyers and strategists to identify the risks of a British exit, or Brexit. Wary of meddling in politics, however, they have largely not detailed their plans for the June 23 vote. But smaller companies in the manufacturing heartlands, crucial to the economy and often inextricably linked to continental Europe, are formulating contingency plans that illustrate the risks facing businesses across the country and the steps being taken to mitigate them. At the start of 2015, almost half of Britain's private-sector turnover came from firms that employed fewer than 249 people, according to the

Department for Business. For Cheetham his "disaster plan" involves jettisoning nearly half of his 30 employees if a Brexit compounds the drag from an already slowing global economy at his firm in the English rural town of Hereford. Across the nearby Welsh border, Gareth Jenkins, who runs a toolmaking firm, has identified which major customers in Europe are likely to abandon him should they have to accept higher costs or slower delivery times that might come from new border controls with EU countries if Britain leaves the bloc. He has calculated the financial impact and says in a worst-case scenario he could lose 25 percent of his turnover. He plans to tell his 91 employees in the next couple of weeks that a vote to leave could force him to lay off a quarter of staff.

With crisis plans and cuts, British bosses brace for Brexit

Branded merchandise is seen in the office of pro-Brexit group pressure group "Leave.eu" in London, Britain. REUTERS/Neil Hall

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asks Cheetham of his 27-year-old firm based on a small industrial park nestled in rolling countryside 190 km west of London. "If we screw up, Boeing in Seattle stops or Airbus in Toulouse stops ... it's all interconnected." Clutching a component of an airline seat in his right hand, the 58-year-old details how the aluminium came from Finland and the fittings from Germany to meet an order from a French customer in Wales who will send it on to Toulouse or Seattle. To his left is a large folder detailing the certification process the firm went through to allow it to win work in the aerospace sector. Known as the Aerospace Quality Certification AS9100C, the six-month process cost about 20,000 pounds. The EU contributed to that cost in its bid to improve productivity and competitiveness in the bloc and Cheetham said it would have taken much longer to complete had he needed to stump up all the cash. Leaving the bloc, Cheetham worries that his firm could miss out on this kind of advantage and become less competitive. "Our ability to increase prices is very limited - whenever we try, we lose work," he said. He has pushed back the hiring of a new senior engineer until after the vote.

pounds. A spokesman for Vote Leave, one of the groups campaigning for Britain to leave the EU, said the concerns were unfounded. The group argues companies would benefit from fewer regulations imposed by Brussels, while the government could be more nimble in agreeing trade deals with the likes of India, China and the United States. "The UK is the EU's largest market so every incentive exists for the UK to strike a free trade deal with the EU while using its new-found control to also strike free trade deals across the world," it said. GLOBAL TIES Cheetham's focus is closer to home. He bought PK Engineering in Hereford, close to England's border with Wales, four years ago after a career in the automotive and finance industry. With its 1.5 million pound turnover and 10,000 square ft factory, he says he is too small to employ consultants or lawyers ahead of the vote. Like many of Britain's high-precision manufacturers, most of PK's goods - 90 percent - are exported to global supply chains, ending up at the likes of Boeing's factory in Seattle or Airbus's base in Toulouse. "You think we're a rural business?"

POOR VISIBILITY Very little is clear ahead of the referendum called by Prime Minister David Cameron, with British voters divided on membership and both sides in the debate arguing Britain would be financially better off if their cause succeeds. The fears of business owners like Cheetham and Jenkins are driven by what most Britons - on either side of the debate - accept is unchartered economic territory should Britain vote to leave the group it joined 43 years ago. The terms of any divorce would be subject to two years of negotiations with the EU, with no guarantees of how the new order would look. At present British companies trading with other EU nations do not face customs tariffs, costly paperwork such as certificates of origin or VAT - sales tax - on imports. Should it opt to leave, Britain may negotiate continued tariff-free access but additional administrative burdens will almost certainly apply, making exporting to and importing from the EU more costly, say business owners and lawyers. They also fear any restrictions on European workers and a prolonged period of a volatile pound, while the effect on the EU of losing its second-largest economy is unclear. Adam Shuter, head of haulier Exact Logistics, is investigating whether he should set up a German office, which he thinks could cost less than the additional taxes and paperwork of serving EU customers from outside the bloc. "For a small business, it's quite a bit of investment," he said. "It just adds a layer of administration." He is also gauging the extra customs costs his British customers might incur outside the EU, using non-members Norway and Switzerland as guides, and looking at how much it would cost to set up expensive software to handle border clearances. He charges an additional 50 to 60 pounds per consignment for customs clearance into those two countries, on top of a typical European delivery cost of 40 to 50

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo. REUTERS/Luke Macgregor

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take delivery of goods from the EU - rather than at the point of sale - making cashflow harder to manage. Facing so many unknowns, business owners such as Cheetham are struggling to plan for the future. Back in Hereford he lets his frustration show. Normally a supporter of Cameron's Conservatives, he says he is furious at the position the government has put business owners in. "They are playing roulette with the economic future of the country," he says, hands gripping the table. "We're just hoping for the best. I'm almost in denial."

CUSTOMS CONUNDRUM The customs issues are perhaps most crucial for hauliers such as Shuter's Exact Logistics, which delivers across Europe from its base in Rugby, central England. While lawyers and business owners say any new tariffs could be low, they worry that deliveries could be delayed by customs clearance and additional paperwork, including certificates of origin and export tax declaration documents. Shuter and one of his clients, Pete Churchill from Robert Welch Designs, estimate that the additional paperwork could mean the cost of a consignment jumps to between 150 to 200 pounds from the current 50 pounds. That compares with the value of the consignment which can sometimes be as little as 500 pounds. Sitting in an office crammed with filing cabinets and maps of Europe, Shuter is investigating how much it would cost to buy a new software system that could clear consignments with European tax and border authorities if Britain were to operate under different rules. "You're probably talking in the region of 10-20,000 pounds, so it's relatively significant," he said. British importers also fear they will have to pay VAT sales tax when they

"If we do vote for Brexit we will have a prolonged period of uncertainty and everything will grind to a halt, he said. "And we don't want to be caught holding the debt." 'MAPPED OUT IN MY MIND' Any move that led to British manufacturing firms losing their place in global supply chains would deal a major blow to the British economy; the sector accounts for a tenth of its output and employs 2.65 million people, the vast majority in small and medium-sized firms. Just over one hour's drive from Hereford through country lanes decked with daffodils stands Jenkins' 55,000 square ft toolmaking factory, a Welsh firm entwined in similar networks. Like Cheetham, 59-year-old Jenkins has been studying contracts and trying to work out whether three of his biggest clients, all based in Germany, would be able to cope if they had to accept higher costs or slower delivery times. He estimates that one if not two would stop using his FSG Tool and Die, Europe's largest privately owned design and build toolmaking firm. "I have mapped this out in my mind," he says, in a room off the spotless factory where tools are being built to make everything from yoghurt pots to replacement hips and car parts. "The minute we vote to leave customers will say there's a risk here and we need to mitigate it. We ship tools from here on Monday that they'll be using by Thursday. What happens if that is disrupted?" he said, fearing that they will look elsewhere. Jenkins fears losing the close links he has developed with other EU firms should a vote to leave exclude it from the free movement and trade that has made the alliances work. Up against the might of low-cost centres such as China, he teamed up with firms in Germany, Sweden and elsewhere to train one another's apprentices, refer sales, bid for emerging market work and hire a rep in Singapore to cover all their needs.

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- “Brexit” could cost Britain 100 bln pounds and a mln jobs

- Britain’s new minimum wage feeds in to ‘Brexit’ debate

Branded balloons are seen in the office of pro-Brexit group pressure group "Leave.eu" in London, Britain February 12. REUTERS/Neil Hall

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I f Britons vote to leave the EU, London's financial center faces losing one of its top money spinners - the trade in trillions of

euros in derivatives - and the European Central Bank will be pushing hard for the business to move onto its patch. According to euro zone central bank officials, the ECB is determined to tackle an anomaly dating from 1999 when Britain opted out of the euro's launch: a dominant share of trading in the currency it issues goes on outside its jurisdiction in London. Euro zone officials are reluctant to discuss publicly such a sensitive issue - and the risk that London could lose out to rivals Frankfurt and Paris - before the June 23 referendum on a British exit from the European Union. But Christian Noyer, a former ECB vice president and Bank of France governor, is free to make the case as he no longer holds a high office in the euro zone. "If Britain left the EU, the euro area authorities could no longer tolerate such a high proportion of financial activities involving their currency taking place abroad," he said. "It is already very difficult for euro

members to accept that our currency is largely traded outside the currency area, beyond the control of the ECB," Noyer wrote in an article for economic think tank OMFIF. Two euro zone central bank officials, requesting anonymity, made the same points to Reuters. The trading of euro-based securities spans trillions of euros of derivatives deals as well as the 'repo' market providing short-term funding for banks - 2 trillion euros of which experts say is based in London. On top of this, there is foreign exchange trading in the currency itself. The Frankfurt-based ECB wants oversight of this business for a practical reason: if any disaster were to hit these markets like the 2008 collapse of Lehman Brothers bank in the United States, it would be responsible for dealing with the crisis. The ECB declined to comment on the derivatives oversight issue. OUTLIER STATUS Supporters of a British exit from the EU say predictions of London's demise as a financial centre when it failed to adopt the common currency proved wrong, and the same would be

true in the event of a "Brexit". So far, campaigning has focused on issues ranging from immigration to the Brussels bureaucracy, with Brexit supporters arguing that the EU has moved far from the bloc's original aim of merely boosting trade within Europe. However, the City of London remains a major employer and accounts for 12 percent of the British economy, generating roughly 66 billion pounds ($93 billion) in tax revenue a year for a cash-strapped exchequer. So far, Britain's EU membership has helped London to maintain its position as Europe's financial capital, with the result that the ECB is set apart in one crucial respect from the Bank of England, the Bank of Japan and U.S. Federal Reserve. "In big currency areas - including sterling, yen, dollar - the central bank has a significant hold on trading in the domestic currency," said Nicholas Veron, EU financial services expert at the Bruegel think tank in Brussels. "The euro zone is an outlier and that is supported by the EU framework but if that is no longer there, this outlier status might not be sustainable," Veron added.

Brexit risks taking multi-trillion euro trading from London By John O'Donnell, Huw Jones and John Geddie

BREXIT LONDON -THE FINANCIAL HUB

The Euro sculpture is partially reflected in a puddle on a cobblestone pavement in front of the headquarters of the ECB in Frankfurt Janu-ary 21, 2012. REUTERS/Kai Pfaffenbach

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The ECB has already tried to assert its authority, insisting that clearing houses that process euro derivative trades should be based in the 19-nation currency bloc. Britain mounted a legal challenge to defend its financial sector and won at the EU's second-highest court last year. But banks and other market players expect the tables would turn after a Brexit, eroding London's preeminence in a derivatives market that has thrived in spite of the financial crash. A recent legal study by the Association of Financial Markets in Europe, whose members include HSBC, Deutsche Bank and broker ICAP, identified this risk. If Britain finds itself outside the European single market, UK-based

institutions could lose the right to use "passporting" rules which currently allow them to provide cross-border services to clients elsewhere in the EU. "Under Brexit, market infrastructures could not permanently rely on the EU passporting arrangements," Simon Lewis, the association's chief executive, told Reuters. The International Capital Market Association, whose members include treasury departments of companies such as GE and banks like Goldman Sachs, have come to the same conclusion, warning of a threat to "London's competitive position". EU governments could press the issue, along with the ECB which since late 2014 has regulated the euro zone's biggest banks, although those

headquartered elsewhere might be less willing to respond. "The EU can exert a lot of pressure and make rules that are so complicated that it makes sense for the continental banks to take their trading back to Paris or Frankfurt," said Soeren Moerch, head of fixed income trading at Danske Bank. "But I am much more sceptical as to whether the big American banks would move their main European trading hub from London." Graham Bishop, a regulatory consultant, believes the ECB would use its full powers. "It would be extraordinary for the ECB to allow trading and use of its money to go on outside its control," he said.

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B ritain's benchmark equity index will not make much, if any, progress for the rest of 2016, due to uncertainty

over the country's vote on European Union membership and fears of a global slowdown, a Reuters poll found. The poll of 27 traders, fund managers and strategists, taken in the past week, gave a median forecast for the FTSE to end 2016 at 6,350 points. It was forecast down at 6,000 points by the middle of 2016. This would represent the FTSE making minor gains of some 3 percent from 6,174.9 on March 31st, by year end. Citigroup and UBS forecast the FTSE ending the year at

6,600 and 6,500 points respectively, but JP Morgan was more bearish with a 5,950 point forecast. The FTSE 100 hit a record high of 7,122.74 points in April 2015 but has since lost ground, partly due to concerns about a China-led global economic slowdown, something which could weigh on stocks this year too. Britain's June 23 vote on whether to leave the European Union has added further uncertainty. "Markets in general don't like uncertainty and the indecision that would arise following the UK leaving the EU is highly unlikely to be supportive of indices," XTB UK analyst David Cheetham said. Opinion polls have been close but the "In" campaign has mostly been

showing a slight lead. Traders said any Brexit worries would weigh more on the FTSE 250 mid-cap index than the FTSE 100, since a drop in sterling could benefit the internationally-focused exporters that tend to be in the FTSE 100 rather than the FTSE 250. "We are working on a 35 percent chance of Brexit. If the UK remains, there is likely to be an equity rally, if the UK leaves the stock markets will be subdued while uncertainty remains as the UK negotiates deals with Europe," Horizon Stockbroking director Kyri Kangellaris said. Traders and fund managers also said underlying, persistent worries about a China-led global economic slowdown could hinder the FTSE's progress.

Brexit uncertainty to limit gains in Britain’s FTSE index By Sudip Kar-Gupta

'NUCLEAR PLANT' According to the Bank for International Settlements, interest rate swaps accounted for $435 trillion of the world's $550 trillion derivatives market in 2015. London-based LCH.Clearnet, in which the London Stock Exchange owns a majority stake, clears more than half of all interest rate swaps traded globally. Daily it clears about $3.3 trillion in such swaps, with $1.76 trillion in dollar-denominated contracts. Euro-denominated contracts total 736.3 billion euros or $836.6 billion and are the second largest component. LCH, using what it says are robust risk controls, essentially underwrites such deals, stepping in if a buyer or seller drops out. However, the ECB wants better oversight of the clearing houses that one bank lobbyist called the 'nuclear power plants' of financial markets, to avert any Lehman-style collapse. "In the end, the ECB is responsible," said Bishop. "The ECB is the only one which can create new euros in a liquidity crisis." BRIGHT FUTURE OUTSIDE Nigel Farage, who leads the United Kingdom Independence Party,

believes London has a bright future outside the EU if Britain negotiates a new relationship with the bloc. "I heard the same argument 15 years ago about joining the euro. 'If you don't join, trading will move to Frankfurt'," he told Reuters. "That was wrong then and it's wrong now. London is a global trading centre. By leaving the EU and doing a deal after we left, we might get a better deal for financial services than we have today."

Few in the City share his optimism. Brexit and a possible shake up of derivatives is already shaping thinking around a planned merger between Germany's Deutsche Boerse and the London Stock Exchange. Both own clearing houses. Although LCH.Clearnet in London and Frankfurt's Eurex specialise in different types of derivatives, this could change, allowing more processing of euro-based trades, say, to happen in Frankfurt.

REUTERS INSIDER Brexit pressure builds on UK government

Research commissioned by the Confederation of British Industry suggests a vote to leave the EU could cost the UK economy as much as GBP100 billion by 2020 and nearly a million jobs.

POLL

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a level drop in GDP of 1 percent to 2 percent in the short term due to the toxic blend of depressed business confidence, tightening financial conditions, higher inflation and falling real income." The pound would fall to 83 pence per euro and $1.20 per dollar if euro/dollar pushes lower towards parity.

CITI: GDP growth cut by 1-1.5 percentage points for 2017, 2018, and 2019, giving a total GDP loss of around 4 percent relative to potential. Sterling could fall 15-20 percent from current levels.

UNICREDIT: Brexit would cost the UK economy "around 6 percent of GDP" over the next decade or so, risk a balance of payments crisis.

GOLDMAN SACHS: Trade-weighted sterling would fall 15-20 percent, potentially dragging sterling/dollar down to around $1.15-$1.20 and lifting euro/sterling to around 90-95 pence.

NOMURA: "An unwillingness of external investors to finance the current account on current terms could cause a collapse in the currency of 10-15 percent over several months."

ABN AMRO: "The Brexit scenarios see 2017 GDP 1-3 percent lower in the UK, up to 1.5 percent lower in the euro zone and sterling/dollar falling to as low as $1.15."

UBS: "We estimate the downside from a 'Hard' Brexit could be close to 3.0 percent of UK GDP over time. We expect the Bank of England to raise rates in November this year, but a vote to leave the EU could easily see that timing slip."

HSBC: Sterling could fall 15-20 percent against the dollar, pushing euro/sterling towards parity and triggering a 5 percentage point surge in inflation. UK growth could fall 1-1.5 percentage points next year, or even further in the unlikely event of the BoE raising interest rates in response.

CREDIT AGRICOLE: Sterling could fall to $1.30 in case of a Brexit.

RABOBANK: "We would expect EUR/GBP to head back towards the 0.85 area initially."

JP MORGAN: "UK growth could slow to 1 percent in the year following a vote for Brexit.

Depending on how long the shock to uncertainty persists, GDP growth could slow by as much as 3 percentage points relative to trend in the most extreme case." If the BoE is forced to cut rates, 2-year and 5-year gilt yields could fall 25 basis points and 35 bps, respectively.

DEUTSCHE BANK: "It is not difficult to envisage a hit to annual GDP growth well in excess of 1 percentage point per year" during the 2-3 years (or maybe more) of post-vote negotiations. Deutsche's existing sterling forecasts of $1.15 by end-2017 and euro/sterling at 82.00 by end-2019 could be brought forward.

SOCIETE GENERALE: GDP growth could be 0.5-1.0 percentage points per year lower on average for a decade.

MORGAN STANLEY: A "significant" consumption and investment shock leading to a 1.3 percentage points hit to growth in 2016-17. A 5 percent decline in sterling/dollar, falling to $1.39 initially "with weakness persisting". UK stocks could underperform global peers by up to 20 percent.

CREDIT SUISSE: "In its most extreme that could mean

Banks agree Brexit would be bad for UK growth, sterling. By Jamie McGeever

Economists at some of the world's biggest banks are unanimous that Britain's economy and currency will suffer if the country votes to leave the European Union. But how bad would the damage be? Below is a snapshot of estimates from 14 banks on the potential impact of "Brexit" on UK growth and the value of the pound, and from the three major credit agencies of the impact on Britain's debt rating.

RATINGS AGENCIES:

BANKS:

MOODY'S "Exit from the EU would be negative for the UK economy in the short and possibly medium term. The medium-term economic impact depends crucially on the new trade arrangement that the UK would be able to negotiate with the EU. We might assign a negative outlook to the rating in case of a vote to exit, to reflect our expectation of lower

economic growth and a potentially lengthy period of uncertainty."

S&P Brexit could "put at risk important external financing sources for the UK's sizable current account deficit. In a worst-case scenario, a Brexit could also harm the sterling's role as a global reserve currency, removing what has been a significant

support for our 'AAA' rating since the start of the global financial crisis."

FITCH "Brexit would be 'moderately' credit negative for the UK. Chance of second Scottish independence referendum would shoot up. Independence would lift debt/GDP to a dangerous 10 percent."

FACTBOX

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uninvolved in the Brexit trade," said the European head of hedge fund sales at one of the top 10 currency trading bank. "There has been interest, but most have not participated in the (sterling) move from $1.50 to $1.40," he added. "It already looks too pricey for them to make the jump." The pound has just put in its worst three-month performance since the depths of the financial crisis seven years ago, losing almost 9 percent against a basket of currencies since the start of December on Brexit worries and as investors pushed back their bets on a rise in interest rates. Against the dollar, sterling hit seven-year lows recently, within 3 cents of lows last seen when it was en route to a 1-for-1 exchange rate (parity) with the dollar in the mid-1980s. Speculators reduced net bets for a weaker British pound, suggesting hedge funds played no major part in

who invests about $25 billion in hedge funds. "People don't think Brexit will happen, first of all, and now the price of sterling has fallen and the price of an implied volatility option is high." Most bookmakers - watched more closely than opinion polls in financial markets after calling a series of major political events in the past decade more accurately - show only a 1 in 3 chance of a British vote to leave the EU. But even if that does happen, hedge fund managers say the uncertainty over the aftermath is too high to make a large "short" sterling position - a bet that the currency will fall - in the run-up or immediately after the vote an attractive play. Some even reckon the euro currency may fare worse over the long term if Britons vote to leave the wider 28-nation EU bloc. "The big funds have been fairly

H edge funds, whose speculating contributed to the pound's devaluation in 1992, have yet to make

major bets on Britain leaving the European Union because few expect it to happen and most doubt a big payout from market moves around the June vote. Asset managers and hedge fund desks at major banks contacted by Reuters said "tail risk" funds which bet on major financial events such as the euro zone's debt crisis or the global credit crash think the risk of a pound meltdown is just too small. And many of the shorter-term day-to-day speculators appear to have missed the bulk of this year's 9 percent drop and do not see a 'big short' on the pound as worth the risk, they said. "It's not a high-quality exposure to have on," said GAM portfolio manager Anthony Lawler in London,

No “big short” yet for hedge funds on Brexit By Jemima Kelly and Patrick Graham

BREXIT

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Norway's $830 billion wealth fund: Brexit not a significant risk

stocks that he invests in to the maximum 20 percent that the fund allows, effectively backing the dollar against the pound. Others think a short euro position is more attractive, arguing that Britain's debate could encourage eurosceptic parties in other EU states, including those using the euro. "If the market takes a risk-negative view on Europe based on the political dynamic it will suit our portfolio," said Omni Macro Fund portfolio manager Christopher Morrison. "In this instance, we are not short the euro but following the political developments in the euro is of more interest than Brexit."

themselves against a sterling collapse. That has driven the price of options that allow investors to hedge against further big falls in sterling against the dollar over the next six months to a 4-1/2-year high of over 13 percent. "The risk premium priced across the curve is quite significant and that has left lots of people thinking it is too expensive," said the head of FX sales with one of London's top six banks. "The majority of the flow (has been) dominated by slower moving accounts like real money and corporates." Equity portfolio managers who already have exposure to sterling through their stock holdings are being forced to take a view which is, largely, that sterling is likely to be weak in the run-up to the referendum. London-based Liontrust Macro Fund manager Stephen Bailey, who invests in equities from a fundamental view point, has increased the proportion of U.S.

that fall. Most macro hedge fund managers, who can take long or short positions on a range of assets based on macroeconomics, do not think the risk/reward ratio of shorting sterling is skewed in their favour. COSTLY TO HEDGE The currency market's number four bank, UBS, this week predicted sterling might fall to parity with the euro in the aftermath of an "Out" vote. Several other banks - including Citi, HSBC and Goldman Sachs - have all said the pound could lose up to 20 percent of its value on a Brexit. However, investors say currency options - derivatives which provide for payouts under a variety of future conditions - which are the natural place to bet cheaply on big falls in sterling, have become too expensive. The difficulty is that overseas companies and big institutional investors with UK share portfolios are buying the same options to protect

The Barclays Bank building is seen in London's financial district of Canary Wharf. REUTERS/Kevin Coombs

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are capable of carrying 2 million barrels. The price of Forties oil, together with the Brent, Ekofisk and Oseberg crude streams, sets the price of dated Brent, the benchmark on which most of the world's oil trades are based. "A leave vote would likely generate some confusion and uncertainty rather than a dramatic change," Energy Aspects analyst Richard Mallinson said. Mallinson said that while the existing FTA created an additional incentive to UK and other European exporters, the profitability, or arbitrage, of shipping Forties to South Korea was not based exclusively on this. The economics of the trade hinge on a number of factors, such as freight rates, and the competitiveness of a Brent-linked crude such as Forties, against a more local crude grade based on the Dubai benchmark. "It's the fact that Forties is what you can load at Hound Point onto VLCCs, making it the easiest, most economic North Sea crude to bring on long haul once that arb window opens.

A section of the BP Eastern Trough Area Project oil platform is seen in the North Sea, east of Aberdeen , Scotland. REUTERS/Andy Buchanan

Brexit may scupper Forties crude oil trade to Asia By Amanda Cooper

O ne of the most popular plays in the oil market could be stymied should Britain vote to leave the

European Union in June, which would force South Korea, a major buyer of North Sea oil, to rejig a long-standing trade agreement for crude imports. Under a free-trade agreement with the EU that has been in place since 2012, South Korea, Asia's fourth-largest economy, has become one of the world's biggest buyers of North Sea oil, still a significant source of revenue for the United Kingdom. The deal allows EU exporters to sell their oil to South Korean refineries tax-free, and Britain is the biggest beneficiary of this break. The North Sea supplies 2 million barrels per day, or just below 2 percent of the world's oil. Close to a quarter of this comes from the Forties field, from which crude is piped to the Scottish terminal of Hound Point and loaded onto ships. "If Britain officially drops out from the EU, the customs tariff will be raised back to 3 percent, which will likely

cause a further decline in crude imports from Britain," an official at South Korea's Ministry of Trade, Industry and Energy said. "However, to minimise such effects, we will consider a separate FTA with Britain, but nothing has been fixed." Denmark and non-EU member Norway also extract oil in the North Sea, but Reuters shipping data shows neither country has exported a regionally produced crude to South Korea in the past few years. BUYING BRITISH BARRELS According to Korean customs data, Europe accounts for about 7 percent of South Korea's roughly 90 million barrels a month in oil imports. Most of Europe's contribution is Forties, Reuters trade-flow figures show. A barrel of Forties oil trades at a premium or discount to the dated Brent benchmark and can be impacted by a single fixture for a Very Large Crude Carrier to South Korea appearing on shipping lists or failing to make a voyage. VLCC supertankers

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T he stakes will be high for Britain's historic role as a free-trading nation when it holds a referendum on

whether to stay in the European Union. There is no precedent for an economy as big as Britain's leaving a trade bloc, and the rival campaigns paint contrasting pictures of what quitting the EU might mean for its trade. Below are some of the main issues around the potential risks or benefits

for British trade of a so-called Brexit. TRADE WITH EU - HOW MUCH RISK? Britain's most important trade partnership is with the EU's single market, the world's biggest trade area. Campaigners seeking to keep Britain in the EU say it would be in a weak negotiating position if it left and then sought to hammer out a trade agreement with its former partners,

something many "out" campaigners say they want. Government figures show 12.6 percent of Britain's economic output is linked to exports to the EU's 27 other members, for whom only 3.1 percent of output is linked to exports to Britain. Pascal Lamy, a former head of the World Trade Organisation, said a post-Brexit Britain would probably have to resort to raising its import tariffs on EU and other countries' goods or restricting access to its market in

By William Schomberg

Brexit and Britain - what would it mean for UK trade?

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services in order to gain some muscle for trade talks that could last as long as a decade. "Britain would have to say, 'Sorry, consumers, but you have to pay more'. It's just crazy," said Lamy, an ex-EU trade chief. In return for a trade deal, the EU would want Britain to make contributions into its budget and to keep on allowing EU citizens to work on its soil -- two big concerns for the Brexit camp. It could also face a long battle to ensure its banking industry did not face hurdles doing business in Europe. "Out" campaigners say the EU would probably be reluctant to reward a breakaway Britain with a trade deal but would not want to impede its firms from selling into the world's fifth-biggest economy by raising tariffs or imposing tough new regulations. They say the boot would even be on Britain's foot because, in value terms, EU exports of goods and services to Britain were worth 289 billion pounds in 2014, substantially more than Britain's 230 billion pounds of exports

the other way. "Commercial imperatives are very powerful, much more powerful than politicians," William Dartmouth, deputy chairman of the UK Independence Party (UKIP), said. If a deal could not be reached and WTO-compliant tariffs were imposed on trade between Britain and the EU, they would be low enough not to impede business, Dartmouth predicted. Tariffs agreed by the EU with the WTO for imports from countries outside the bloc stand at below 5 percent on over a third of factory goods but have been abolished on about 30 percent more; the EU has a nearly 10 percent tariff on cars, a big British export. A breakaway Britain would also need to renegotiate its WTO membership terms with all WTO members, including some with which Britain has frosty relations such as Russia and Argentina.

TRADE WITH REST OF WORLD The Brexit camp says the EU moves too slowly on trade and Britain on its own would strike deals more quickly. The big prizes would be agreements with heavyweights such as the United States, India and China, none of which have full trade pact with the EU to date. But others warn that Britain, with a population of 60 million people, would go into talks in a weaker position on its own than as part of the 500-million strong EU. "It's not a question of being smart or not. At the end of the day it depends on how much clout you have," said Arancha Gonzalez, head of the International Trade Centre, a joint agency of the United Nations and the WTO. A 2013 trade deal between Switzerland and China, which some Brexit supporters say shows what Britain might achieve on its own, got rid of tariffs on 99.8 percent of Chinese exports to Switzerland

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immediately compared with 77.3 percent of Swiss exports to China, rising to nearly 90 percent by 2028. Fredrik Erixon, at think tank ECIPE in Brussels, said a UK-China deal could provide big gains for British exporters and investors but might come at the cost of Britain providing China with privileged status as an investor or more political support. Simon Evenett, a trade professor at St Gallen University in Switzerland, said Britain might be able to do a deal quickly with Brazil because it does not share the concerns of other EU countries about Brazil's ambitions to export more farm goods. But he said India could repeat a demand it made in trade talks with the EU -- namely that more of its skilled workers be given work visas, touching on a sensitive issue for many Brexit supporters for whom high levels of immigration are a concern. As for the United States, its top trade official said last year Washington's focus was on deals with regional groups not individual nations. And as well as seeking to open up new markets, a post-Brexit Britain would face the challenge of regaining the preferential trade access it currently has with over 50 countries under EU deals, ranging from Mexico to Egypt and Ukraine.

WHO WILL NEGOTIATE FOR BRITAIN? The European Commission has exclusive competence to forge trade deals on behalf of the bloc. If Britain left, it would have to create its own negotiating team able to handle the wide range of complex issues immediately on the agenda. Only a few of the 55 British officials in the European Commission's trade department actually work on trade deals. "Britain's trade negotiators would need technical and legal experience, which is accumulated over many years, and they would be

stretched by the need to negotiate simultaneously on multiple fronts," said Gregor Irwin, chief economist at Global Counsel, a think tank led by Britain's former EU trade chief Peter Mandelson. "No country has ever tried to do this before." But Matthew Elliott, chief executive of Vote Leave, a pro-Brexit campaign group, said more than 1,700 British government staff currently work on trade policy and the country would also be able to use private-sector expertise. "The idea that we are too weak to even strike our own trade deals shows how willing the pro-EU lobby is to do down Britain," he said.

REUTERS INSIDER Can UK economy shake off Brexit shivers?

British industrial output grew in January following a sharp fall in December, helped by a stronger than expected upturn in manufacturing. But the Brexit debate is fuelling concerns over growth.

B ritain's European Union referendum could push up credit costs and weaken sterling more, the Bank of

England warned, as it moved to bolster banks' risk buffers and slow a boom in lending to landlords. The central bank said the outlook for financial stability had worsened since its last report in November, saying a rebound in Chinese lending was "concerning" and that June 23's vote on leaving the EU was now the biggest domestic risk. BoE Governor Mark Carney came under fire from some pro-Brexit lawmakers earlier this month

for exaggerating the dangers of leaving the EU, though the central bank does not have an official position on whether Britain should remain. The BoE's Financial Policy Committee said that "heightened and prolonged uncertainty ... could lead to a further depreciation of sterling and affect the cost ... of financing for a broad range of UK borrowers." While much of the BoE's concern about Brexit was familiar, less expected was its decision to tighten credit checks on landlords and move ahead with a disputed plan to vary the size of banks' risk buffers over the

economic cycle. The immediate impact of both measures is likely to be modest, but they indicate a policy direction and may have a greater effect over time if the Bank expands them. Buy-to-let lending has boomed in Britain in recent years, and is now worth 200 billion pounds ($286 billion). However, Prime Minister David Cameron's government has been keen to boost individual home ownership and is raising taxes on the sector, leading the BoE to fear that banks' plans to raise gross lending to landlords by 20 percent a year might come at the cost of credit standards.

By David Milliken and Huw Jones

BOE warns on Brexit, tightens buy-to-let mortgages

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TOUGHER RULES MAY COME As a result, the BoE has recommended banks ensure they take new tax rules into account when assessing loan applications, check landlords' incomes properly and ensure rental income will be enough to cover a mortgage rate of at least 5.5 percent. The BoE said most lenders already had similar rules, but that it expected enforcing the rules universally would reduce the number of mortgage approvals in three years' time by 10-20 percent compared with doing nothing. "It's timid," Capital Economics's Paul Hollingsworth said, adding much of the gross lending growth was existing landlords switching mortgages rather

than new lending. "They are doing a lot of red flag waving rather than taking some serious action." The Council for Mortgage Lenders said the measures did not appear to curtail existing market practices. Tougher rules may come later, however, if finance minister George Osborne follows through with plans to give the BoE more fine-grained powers over buy-to-let mortgage terms, similar to powers it has already used on residential mortgages. The BoE also said it would start to raise the new cyclical element of its capital framework, which rises and falls as the risk of imprudent lending changes over the business cycle, after policymakers failed to reach agreement in December.

This new buffer sits on top of the minimum and is built up in good times to stop credit supply becoming too frothy, and tapped when the economy weakens and some loans turn sour. Banks will have to hold a 0.5 percent counter-cyclical buffer by the end of March 2017. That is equivalent to a relatively modest 5 billion pounds for the banking system as a whole and halfway towards its neutral level of 1 percent. Moreover, for larger banks the bulk of the increase to 0.5 percent will be cancelled out by a cut in another capital requirement. "While a big symbolic step, there is unlikely to be a large impact," HSBC economist Simon Wells said.

BOE keeps rates steady, says sterling hit by EU vote By Ana Nicolaci da Costa and David Milliken

B ank of England policymakers said sterling had been dealt a big hit by uncertainty in the run-up to

the referendum on EU membership and that growth could slow, after voting unanimously to keep rates steady. The central bank said the upcoming vote could delay some spending decisions, though it said recent indicators suggested growth would keep the same momentum this quarter as it had at the end of last year. The BoE reiterated that interest rates were more likely to rise than not over the next two years and that when they did the rise would be gradual, given likely headwinds. After a rapid recovery in recent years, British growth slowed in the second half of last year and recent surveys show it had a rocky start to 2016, when the country will hold a referendum on its membership of the European Union. "There appears to be increased uncertainty surrounding the forthcoming referendum," policymakers said.

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worries about the world economy, and the perception that the lower bound for central banks' interest rates could be lower than previously thought. These looser financial conditions globally could provide the UK economy with some support. It was the second month in a row policymakers voted unanimously to keep rates at a record low 0.5 percent after Ian McCaffery, an external member of the Monetary Policy Committee, last month abandoned his rate hike vote citing a weaker outlook for wages. The government sharply cut its growth forecasts for this year and next as it delivered its annual budget, after the central bank also revised down its growth estimates in the February inflation report. The BoE expects the economy to grow 2.2 percent this year and 2.3 percent next year, more optimistic than the government's forecasts. Financial markets had fully priced out the possibility of an interest rate hike this year prior to the BoE meeting and

some are even betting the first move will be a cut. Inflation and wage growth have been sluggish for months, but have recently showed signs of a pick-up. Annual inflation edged up to a one-month high in January and wages grew by more than expected that month. But this rise could struggle to gain momentum against the weaker economic backdrop, with the government on Wednesday also cutting its inflation forecasts for 2015 and 2016. The BoE said the near-term outlook for inflation had changed little since the February inflation report, but added that it remained watchful for signs that low inflation might be weighing on wages. The BoE has said it has more ammunition to help the economy if it is needed, but Governor Mark Carney has ruled out following in the footsteps of his European and Japanese counterparts with negative interest rates.

"That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term." BoE Governor Mark Carney, in a recent appearance before lawmakers, pointed to some benefits of Britain's EU membership, but said the BoE would not comment on the long-term implications of an exit. Britain's economy has slowed, along with the rest of the world, and some policymakers worry they may struggle to fend off the latest global downturn after pumping trillions into the global financial system in recent years and given that interest rates in major economies are already so low. The Federal Reserve said the United States continued to face risks from an uncertain global economy and appeared to sharply scale back its plans for interest rate rises this year. The BoE said short term interest market rates had fallen due to market

A man walks past the Bank of England in London October 6, 2005. The Bank of England left interest rates unchanged at 4.5 percent on Thurs-day, but analysts are hotly debating when and what the central bank's next move will be. REUTERS/Russell Boyce

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F or campaigners battling over Britain's EU membership, the pound's sharpest fall since the depths of the 2008

financial crisis creates political gold dust. The pound tumbled to a seven-year low against the U.S. dollar in the four days since London Mayor Boris Johnson defied Prime Minister David Cameron and threw his weight behind a British exit. The fall of the symbol of British economic strength goes to the heart of what anecdotal Reuters reporting, some opinion polls and past elections show could be the most important question for voters: Am I richer or poorer out? Cameron says dropping out would be a leap in the dark, while Goldman Sachs and HSBC - which have both backed EU membership - cautioned that the world's fourth-most traded currency could lose as much as a fifth of its value if Britain left the club. Pro-Europeans cast sterling's hiccup as an omen of the chaos that would follow a divorce. Opponents said voters would be unimpressed by scaremongering from elitist banks which in the 1990s warned of dire consequences if Britain opted out of the euro. "It suits multinational banks to create volatility from which they can profit," Richard Tice, a property entrepreneur who is helping to fund the Leave.EU campaign, told Reuters. "A lower sterling is good for exports, which is good for jobs, and there is no

inflation to worry about from imports, since deflation is the greater issue." The currency's fall prompted a rare comment on economic matters from Foreign Secretary Philip Hammond, who said it was a warning of the impact of leaving the EU. "A vote to leave is a vote for an uncertain future, that's a simple fact, and that uncertainty would generate immediate and negative reactions in financial markets ... We've already had a foretaste of that this week in the currency markets," he told parliament. The "Stronger In" campaign said the pound could be worth 20 percent less if Britain leaves Europe. "That means petrol, home gadgets, weekly shopping, holidays COST MORE," it said in campaign material. DEFENDING THE POUND The fate of sterling, and London's dominance of the $5.3 trillion-a-day global foreign exchange markets, have long been central to Britain's perception of its tumultuous relationship with its European neighbours. One of the world's oldest currencies continually in use, sterling was once a symbol of Britain's imperial might and has been used by both Cameron and eurosceptics as a symbol of British exceptionalism. Nigel Farage's UK Independence Party even uses the "£" sign as part of its emblem while Cameron lauded his European deal as giving protection to

the currency. "We have not just permanently protected the pound and our right to keep it, but ensured that we can’t be discriminated against," Cameron said. He has not commented publicly on the fall in sterling. Cameron had a front-row view of a currency crisis as a 25-year-old Treasury adviser in 1992, when then Prime Minister John Major was forced to pull sterling out of the European Exchange Rate Mechanism , a system intended to reduce exchange rate fluctuations ahead of monetary union. TOURISM BOOST "Black Wednesday", on Sept. 16 of that year was Britain's biggest financial humiliation since the sterling crisis of 1976 and helped turn British opinion against the monetary union. Britain under Tony Blair later decided not to join the euro and thus locked itself out of the EU's inner 19-member euro zone core. The pound has fallen against the euro this year. With the pound just 4 cents above levels last seen when it sank towards parity with the dollar in the mid-1980s, the "in" campaign said the fall in sterling showed the risks of leaving the world's biggest economic bloc. "This starkly underlines the dangers of Britain leaving Europe. Our economic security would be put at risk and family finances would be hit as a result," Lucy Thomas, Deputy Director of Britain Stronger In Europe, told Reuters. "It is essential that Britain retains access to Europe’s free trade single market of 500 million consumers," Thomas said. "Indeed, the mere possibility that Britain might leave the EU has now resulted in the value of the pound falling." Some businesses are not so sure. “The truth is a weaker pound is good for British industry, it’s good for exports, it’s good for tourism," said Nick Varney, CEO of Merlin Entertainments, the world's second-biggest visitor attractions group behind Walt Disney.

Pound tumbles to the center of Britain’s EU battle By Guy Faulconbridge

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B ritain's economy would be worse off if the country left the European Union, according to foreign

exchange strategists who said a so-called Brexit might also cause a sterling crisis. None of the 45 strategists polled by Reuters said the economy would benefit if the "Out" campaign wins. Thirty-nine said it would damage the economy and six said it wouldn't make much difference. All but one economist polled by Reuters last month said the economy would suffer; the exception said it would have no effect. "The negotiating period would be far longer than some have suggested. There was a government report earlier this week that said it could take as long as a decade, so you would have that uncertainty hanging over businesses," said Ryan Djajasaputra at Investec. The prospect of Britain's leaving the EU rattled the country's dominant services industry last month, driving growth to a near three-year low, a survey showed earlier on Thursday. Strategists were less sure a departure would lead to a sterling crisis, with 35 saying there would be and 34 not. "It depends on the definition of what constitutes a crisis, but sterling has the capacity to drop sharply enough to create significant uncertainty about inflation and investment," said Jane Foley at Rabobank.

Recent polls put the outcome close but narrowly in favour of staying in. Even so, the pound sank to a seven-year low last week after London Mayor Boris Johnson put himself at the front of the "Out" campaign. The currency has lost around 9 percent against the dollar since the Conservative party won power in May last year, with Prime Minister David Cameron promising a vote on membership, suggesting much of the risk may already be factored in. Sterling is forecast to trade around $1.40, where it currently hovers, in a month's time and still be there in three months, just before the vote. A year from now cable will be trading at $1.46, the poll predicted.

Those forecasts are all a cent or two weaker than predicted a month ago, after a chain of recent data delayed some calls for policy tightening from the Bank of England. Against the euro, sterling is expected to gain ground. The European Central Bank is almost certain to cut its deposit rate further into negative territory and possibly expand its asset purchase programme next week, a Reuters poll found. In a month's time, one euro will be worth 77.2 pence but only 73.9p in six months. In a year it would fetch 72.4p. The respective forecasts in last month's poll were 75.3, 73.8 and 71.4.

Brexit would hurt UK economy, may lead to sterling crisis By Jonathan Cable

A pile of one pound coins is seen, in central London June 17, 2008. REUTERS/Toby Melville

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