Investors have been keeping a wary eye on the United Kingdom to see if voters on Thursday will approve a measure to leave the European Union.

The latest polls show a slight lead for people who want to remain in the EU, and maintain personal freedoms and trade ties that come with belonging to the 28-country group. But if the UK does vote in favor of exiting the EU, chaos could grip markets at least in the short term.

“Any fallout would be concentrated in European bond and equity markets, with high-debt sovereign bonds (think Spain and Italy) and Eurozone bank stocks taking the brunt of the damage,” writes Anthony Mirhaydari of CBS Moneywatch. “With major central banks already preparing for coordinated liquidity injections, any selloff would likely be short lived.”

Federal Reserve Chair Janet Yellen on several occasions has cited the possible Brexit as one reason for caution in U.S. monetary policy. Earlier this year, slower economic growth China and a collapse in oil prices to 13-year lows were seen as the most important risks.
Wall Street banks have published market scenarios for a Brexit.

“Morgan Stanley warns British stocks could lose nearly 20 percent in a Brexit win scenario,” according to CBS Moneywatch. “Bank of America Merrill Lynch believes U.S. stocks could lose upwards of 7 percent. Citigroup sees European stocks down 20 percent. Deutsche Bank sees 10 percent downside risk.”

Traders are hedging their bets for a market fall by buying put options, which allow an investor to sell a security at a predetermined price. The CBOE Volatility Index, a measure of “fear” in the market, on Wednesday afternoon traded at 19.7, compared with its 50-day moving average of 15.3.

Bank of America Merrill Lynch said the Brexit fear is showing up in fund withdrawals, with the second-largest outflows from U.K. stock funds in the past decade.

Hedge fund billionaire George Soros this week has warned of the economic chaos that would ensue after a Brexit.

“Too many believe that a vote to leave the EU will have no effect on their personal financial position,” Soros wrote in the UK’s Guardian newspaper. “This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously.”

Britons would suffer as the value of the pound dropped by 15 to 20 percent or more, greatly diminishing their spending power, especially for foreign goods. Foreign exchange traders who are shorting the pound would profit, Soros said.

“Brexit would make some people very rich, but most voters considerably poorer,” Soros wrote.

Related Stories:

• Strategist Lewitt: Corporate America Sowing Seeds of Next Crisis
• Fitch: Negative Bond Yields Take $24 Billion a Year From Investors