At 2:00 a.m. EDT on Friday, June 24, 2016, the final voting results from Britain’s referendum on whether to leave the European Union (EU) indicated 51.9% in favor of leaving and 48.1% in favor of remaining. One hour later, the European stock markets opened to an air pocket. Five minutes into the session, Britain’s FTSE 100 index was down 8.39%, the Euro STOXX 50 index had plunged 9.73%, and Germany’s DAX index sank 9.14%. By 5:32 a.m. EDT, the exchange rate for the British pound had fallen to $1.33, its lowest level since 1985.

Although the markets exhibited a shocked reaction to the news, there had been plenty of warnings about the risks of a vote in favor of a Brexit, as well as the potential consequences for both Britain and the EU in the event of such an outcome. Although Britain is not a member of the European currency union, known as the eurozone, the nation benefits from the trade barrier-free, EU single market.

Warnings of Economic Risks

In an effort to assess the global economic consequences of a potential exit from the EU by Britain, the International Monetary Fund (IMF) conducted an official mission pursuant to Article IV of the IMF's Articles of Agreement. In its May 13, 2016, consultation concluding statement of the mission, the IMF provided the following admonitions about the consequences of a Brexit.

Although Britain would avoid its obligatory, net EU budget contribution of 0.33% of its gross domestic product (GDP), increased trade barriers would bring output losses exceeding 1% of the nation’s GDP. Unless Britain negotiates a new relationship with the EU, the nation would lose its single-market access and become subject to trade barriers in accordance with the rules of the World Trade Organization (WTO). Depending on the terms of Britain’s new economic agreements with the EU and other nations of the world, the United Kingdom’s estimated losses could range between 1.5 and 9.5% of the nation’s GDP. The hit to Britain’s GDP could have contagion effects, causing spillovers to regional and global markets.

Views From Investment Banks

Once it became apparent that a vote in favor of the Brexit was likely, Andrew Sheets of Morgan Stanley (NYSE: MS) advised clients that the European equity markets could experience declines of as much as 15 to 20% from their closing levels on June 23, 2016. Sheets anticipated that U.S. stocks and bonds would benefit from an enhancement of their safe haven status.

Credit Suisse Group AG (NYSE: CS) warned that Hong Kong, Vietnam and Singapore were the Asian economies with the most exposure to the United Kingdom. Nearly 2% of Singapore's GDP results from its exports to Britain. Should the spillover hit the EU, Singapore and Vietnam would be the hardest hit Asian nations because 6 to 7% of their GDP is derived from exports to the European Union.

On June 21, 2016, George Soros expressed his concern that the aftermath of a Brexit could push the U.K. into a recession because the Bank of England had dwindling resources available as a result of the financial crisis. He noted that financial speculators would be the only ones to gain from a Brexit, and the voters would become considerably poorer as a result.

Just before the Brexit votes were completely counted, Deutsche Bank AG (NYSE: DB) provided an outlook of a sustained period market uncertainty. While most news reports explained that Britain would have two years to resolve its official departure from the EU, Deutsche Bank anticipated that it would take three years. The Deutsche Bank forecast included a 15% drop for the Euro STOXX 600 index and a yield of negative 0.10% to negative 0.15% for the 10-year German bund. Other downside risks mentioned in the report included a potential European banking crisis.