UK finally has voted for Brexit. This will mean that the country will leave the European Union (EU).

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As news of Brexit trickled in, markets across the globe have plunged to their lowest. The India the Sensex currently was down 948.71 points or 3.51% at 26,053.51 points.

So what is the process next now that the UK has chosen to leave the EU.

The UK government will have to act in accordance with article 50 of the Lisbon Treaty, according to a HDFC Bank Report.

  • The article suggests that the UK government will have to first notify the EU Council (Heads of State and Government) of its intention.
  • The Council will then have to lay down guidelines for the negotiations process and negotiate an exit treaty.
  • New arrangements to trade, labour laws and financial sector laws will have to be re-negotiated.
  • The exit can take place once the re-negotiated terms are passed by a qualified majority of the EU Council. There is a two-year negotiation period that has been provided for. However, the negotiation period can be extended if required.

The upshot is that even after a vote to leave, the UK economy will still remain part of the EU until new terms have been negotiated.

Whatever negotiations take place, there will likely be at minimum a short-term hit to the economy, said the report. The negotiations can take up to 2 years and could be extended if needed.

While existing trading arrangements will likely remain unchanged, the uncertainty about the future is likely to hit sentiment and investment intention plans resulting in a much weaker growth outcome.

Most UK government agencies and the International Monetary Fund (IMF) estimate that depending on the outcome of the negotiations and duration of uncertainty, UK GDP growth could be lower by anywhere between 1% and 3%, with a high risk of a recession over 2H2016 and 1H02017.

In such a scenario, both the European Central Bank (ECB) and the Bank of England (BoE) could provide swap lines to ease tensions and possibly even intervene (either verbally or physically) if FX movements become extremely disorderly.