A British exit from the European Union could be the most disruptive event for financial markets since the Lehman Brothers collapse, market participants have warned.

Though the short-term effect of a “leave” vote is unlikely to compare to 2008's events, economists and public sector bankers fear that a ‘Brexit’ will trigger a fragmentation of the EU and freeze bond markets.

A poll of polls on Sunday showed the leave and remain camps split down the middle at 50/50 compared with 55/45 in favour of remain at the end of May.

“It is the biggest systemic risk to global markets since the collapse of Lehman Brothers,” said a senior economist at a global bank.

“The UK is the world's fifth largest economy and has the world's biggest global financial sector along with New York; going through such a major change, the consequences could be seismic,” he said.

Could lead to fragmentation of EU

An economist on the buy-side agreed, saying that the effect of a British exit from the EU on the rest of the 28-member bloc could be as important as the effect on the UK itself.

“A ‘Brexit’ doesn't have the same immediate consequences of a Lehman Brothers but it gets more interesting when you look at what it means for Europe,” she said.

A leave vote could trigger anti-EU sentiment across the continent, she said, a significant factor considering Spanish elections come days after the UK referendum and French and German elections are due in 2017.

Both economists preferred not to be identified for fear of breaching UK electoral rules on what can be said regarding the referendum.

The Bank of England's Financial Policy Committee said at the end of March that the risks around the referendum were the most significant near-term domestic risks to financial stability.

Hoarding of cash

One banker who covers public sector debt said investors could shut up shop altogether.

“If you think back to the collapse of Lehman Brothers, at the time investors didn't want to lend money to any banks, not even the safest. They just wanted to do whatever they could to save their cash and the system just froze,” said the banker.

“It's not quantifiable - you just can't calculate the risks.”

Central banks more prepared

While the initial picture could be one of chaos, investors believe that central banks could play a crucial role in ensuring financial markets' stability and stem any potential panic.

“The Bank of England and other central banks are more prepared, and have been making plans,” said Cosimo Marasciulo, head of government bonds, Europe, at Pioneer Investments. “It is a known unknown.”

The UK central bank said on March 7 that it will offer three additional indexed long-term repo operations and will continue to offer dollar liquidity in weeks around the referendum.

First line of defence

“For it to be a global event, it will have to become a systemic event in Europe and that's where the ECB will be the first line of defence,” said David Riley, head of credit strategy at BlueBay Asset Management.

“Sterling assets and the sterling currency are going to have a significant adjustment, though the picture is clouded on UK government bonds because of expectations of a cut in interest rates,” he said.

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