It's Blitz 2: Central Banks Prepare for UK's EU Referendum

Nasty people like Harry Potter's uncle Vernon Dursley--EU "Leave" voter--keep central bankers up at night.

With voting in the UK's EU referendum just a few hours away, the world's major central banks are on standby together with the London bankers into the small hours of Thursday evening and Friday morning. While the latter have making or at least not losing money on their minds, the former have keeping the international financial system intact in the event of a "Leave" vote. Which is, of course, a rather more pressing task.

Of course, the Bank of England is directly in the line of fire. First in the line of fire outside of the UK proper will be the ECB. As it so happens, both appear to be making arrangements in preparing for the worst. It's the European equivalent of the infamous US "plunge protection team," perhaps, as a "backstop" is looking likely if the negative outcome holds:

The European Central Bank would publicly pledge to backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union, officials with knowledge of the matter told Reuters.

The preparations illustrate the heightened state of alert ahead of the June 23 referendum, which will help determine Britain's future in trade and world affairs and also shape the EU. The pound and euro have lost value on fears a Brexit could tip the 28-member bloc into recession.

Such an announcement from the ECB would come on June 24 if an early-morning result showed that British voters had chosen to leave the EU, according to the sources. The aim is to underpin investor confidence across Europe and contain further market jitters.

"There will be a statement to do whatever it takes to maintain adequate market liquidity," said one senior central bank official, who spoke on condition of anonymity.

The ECB's pledge would involve opening so-called swap lines with the Bank of England, allowing euros and sterling to be exchanged and effectively making unlimited funding in both currencies available to European banks, the sources said.

Nor is it an entirely European story as the US and Japan are also going to be pulling out all-nighters since the negative event will likely have global consequences--a strengthened dollar, lower interest rates, and so forth as a "risk off" line of action:

Central banks in Japan, the U.S. and Europe are discussing an emergency supply of dollars to financial markets, seeking to ensure continued access to the currency even if the pound plunges in the event that the U.K. votes to exit the European Union.

The likely plan is to use dollar swap lines between the Federal Reserve and central banks in Japan, Canada and Europe, letting these institutions borrow dollars from the Fed to lend to financial institutions within their jurisdictions.

The Bank of Japan, which provides dollars to financial institutions once a week, will consider carrying out operations on consecutive days if it determines that supplies are running short. The ECB and BOE likely are also discussing specific measures with the Fed. Group of Seven leaders could issue a statement at the same time as an emergency dollar liquidity injection.

The BOJ is communicating and cooperating closely with other major central banks, so it can handle a dollar shortage, BOJ Gov. Haruhiko Kuroda assured reporters Thursday. Fed Chair Janet Yellen said Wednesday that a Brexit would affect the global economy and worldwide financial conditions. Though she mentioned no specifics about the Fed's planned response, a source said the central bank is considering supplying dollars to European markets.

The memory of 2008 is still fresh in the minds of central bankers as the international financial system is threatening to seize up as it did then from a lack of liquidity. This time almost everyone has ammunition on hand--namely foreign exchange, or more usually US dollars--to guard against risk events. 

Everything's now in place. All that remains is the voting. Most of the rest of the world in hoping for "Remain,"  but it's in the hands of the British people whether to avoid or commit economic suicide.