Brexit does not pose any immediate economic problem in the short term as was the case with 2008 global financial crisis, feels Rakesh Mohan, Brookings India Distinguished Fellow and former Executive Director at the International Monetary Fund.
In an interview to CNBC-TV18, Dr Mohan said it is important to calm market sentiment. A big job lies ahead for market regulators and central bankers to allay investor fear by assuring necessary liquidity supply when needed, he adds.
Below is the verbatim transcript of the interview.
CNBC-TV18: What a different story it has turned out to be. The expectation yesterday [on Wednesday, 22 June 2016] was that the ‘remain’ camp will prevail but that is not to be, the UK has now decided to exit the European Union (EU). Despite the fact that the EU at this point in time seems to be putting up a brave front, you have got Donald Tusk coming out and say that all 27 leaders are together and we will take the EU forward. What does this mean in the short-term? I will come to the long-term implications because everyone is still trying to grapple with what this eventuality means. However, in the short-term how do you see this impacting global markets?
Dr. Mohan: It clearly has come as a big shock whereas earlier in the week there was more expectation that the Brexit vote was going to prevail but then last couple of days it had reversed to expectations of the remain vote winning it. So, it did come as a big shock this morning and especially with the margin of the vote for 52 percent to 48 percent and also that within the UK, most of England except for London, voted to exit whereas Scotland and Ireland voted to remain.
The reason I mention that is that what that apart from the immediate fallout one has to start thinking in the longer term what impact it has and we can see today that many markets have fallen. We are yet to see what happens in New York, in the US markets, Wall Street, but I think that one does need to be a little more cautious over interpreting the impact of this in the short-term. Unlike the 2008 crisis when there were indeed objectives and specific problems and very serious problems in the financial sector in terms of a bubble bursting and sub-prime and all that, right now there is no immediate economic problem in the short-term resulting from this.
So, it is all to do with sentiment in the markets and I think that the role of the authorities, the 27 member government of the euro zone, 18 of the euro zone and others in the EU and also the central banks everywhere in the world and securities regulators, etc, they do have a very big job in the coming days to calm markets because as I said, there is no objective immediate short-term problem as far as financial markets are concerned but sentiment of course is a big issue.
CNBC-TV 18: Let me just take that point forward and ask you about the role that central bankers can now play because we had the RBI Governor Raghuram Rajan on the show short while ago and he was talking about the perils of over forecasting this event because we are still trying to understand the full implications. While there is going to be the need for coordinated central bank action, what can central bankers really do at his point in tim; we have had Mark Carney coming out and talking about providing liquidity support, in India the RBI Governor pretty much saying the same thing, the Fed, the possibility now that any possible rate hike is off the table given what has turned out with the Brexit vote. How do you see central bankers reacting now and responding to this?
Dr. Mohan: Exactly what you quote Mark Carney and Raghuram Rajan saying that when markets are falling for this kind of a sentiment reason, then obviously what you need to correct is the sentiments and the kind of shockwaves that are going through the market. Therefore, it is the assurance of liquidity support in domestic currency and then also through the swap arrangements, so, since 2008-2009 crisis, the main central banks in the world that is the US Federal Reserve, the European Central Bank (ECB), Bank of England, the Swiss National Bank, the Bank of Japan and so on, all are standing swap arrangements.
Read the complete transcript of the interview here.
This article first appeared on Moneycontrol.com and CNBC-TV18 on 24 June 2016. Like other products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are those of the author. Brookings India does not hold any institutional views.