Exit for Brexit?
That’s a bit of shorthand, a glib reading of tea leaves for what happens next. Yes, it’s possible that Brexit gets shown the door, amid chaos that puts that option on the table, along with several others.
The chaos here has some wide readings to the Continent at large, and financial services in particular.
First, the options — and at this writing, they each offer winding paths. As known Monday, of course, Theresa May has postponed the vote that had been scheduled for today (Dec. 11) on the deal to divorce Britain from the European Union. The deal as it stood, and stands, would have likely gotten a thumbs down from Parliament, and by a significant margin. The vote itself may be delayed till after the new year. News outlets, among them CNN, reported that May had found that several members of Parliament had objected to what has been termed the Northern Ireland backstop, which is designed to prevent a “hard border” between Ireland and Northern Ireland upon Brexit’s becoming a reality. Ireland will remain part of the EU after Brexit crystallizes.
CNN reported that May will be engaged in last-minute talks, traveling to The Hague to meet with the Dutch Prime Minister, and Parliament is set to debate Brexit, too. Oh, and there’s a European Council summit scheduled for late in the week. Amid all this, the European Court of Justice said that Britain has the power to unilaterally put a stop to leaving the bloc altogether. The EU for its part has said that it will not renegotiate the pact.
So: Renegotiation, no negotiation, thumbs up or down on Brexit through a second referendum. A dizzying array of choices, and none of them palatable if uncertainty is not your cup of tea against a political landscape that could charitably be called emotional.
In sympathy, perhaps, sterling dropped to a 21-month low amid the certainty of uncertainty, and fell to $1.26. As had been discussed last week in this space, and in an interview with Nawaz Ali, senior currency strategist at Western Union, the specter of a deal non-approval held downside risk to Britain’s currency.
As if on cue, too, data showed the continued impact of Brexit on the nation, as Monday saw the debut of data from the Office for National Statistics, which showed that gross domestic product for the three months that ended in October slowed to 40 basis points year over year, down from 60 basis points. The growth rate could be revised lower, said Reuters, as trade deficits mount and factory output fell by one percentage point year on year. Simply put, there’s worry and caution among businesses, and consumers, too, as the data show a decline in the retail and wholesale sectors of a few basis points.
No Man Is An Island/Entire Of Itself …
Poet John Donne wrote that “no man is an island, entire of itself.” In the global economy, no island is an island, entire of itself. That is especially true on a world economic stage in part captivated and captive to the British isle’s fortunes. We might call this a case of a tail wagging a dog, at least a bit, as the U.K. is just chip off a bloc of 27 (or, pre-Brexit, 28) members.
But there’s of course outsized impact for financial services. Britain may indeed charge ahead with the divorce, and that seems the likeliest path, given the fact that millions of people voted for the split. But it’s also possible that the divorce does not hammer out trade deals with the EU, which covers much more than the movement of goods. It also covers the movement of services and people, and in financial services both are assets and critical ones at that, especially for banks.
Will it happen — a mass migration? Forbes, for instance, noted that several executives of big banks state they will have to move staff to Paris or Frankfurt “or both.” But the reality, states the publication, is that unemployment is rather non-existent in financial services in London, which remains the finance capital of Europe. And, continued Forbes, the bank that wants to uproot its London-entrenched bankers will have a hard time shuttling them off to the Continent. In effect the power and allure lies with London, and bankers will simply dig in their heels.
If A Clod Be Washed Away By The Sea …
Maybe, but there is no denying that at least some things will change. Thus, another line by Donne perhaps rings true: “If a clod be washed away by the sea/Europe is the less.” Take one part out of the equation, in this case, it may be that a no-deal Brexit, as the IMF warned over the summer, could have the impact of hitting economic growth by as much as 1.4 percent across the (ex-U.K.) 27-member bloc by 2030. Denmark and Belgium, with close trading ties and geographic proximity, could see impact of roughly one percent. Consider, too, that the U.K. is among the EU’s largest trading partners, at 13 percent of goods and services.
And, late last week, a report from think tank Centre for European Reform said the U.K.’s financial services exports to the European Union could be more than halved (perhaps a sanguine scenario?) amid a free trade agreement, with exports of insurance and pension services off by 19 percent. Law and accountancy services could slip 10 percent. The financial services exports to the EU are worth more than $30 billion .
Amid the chaos Monday, the European Central Bank and the Bank of England are poised to work on agreements that would define the terms of how banks will operate and cooperate in Brexit’s wake. The banks that call the U.K. home will need to expand their banking licenses or gather up new ones from the European Central Bank. ECB Supervisory Board member Ignazio Angeloni said that same day that “we will work in the coming months on a comprehensive memorandum of understanding, covering aspects such as information exchange and the reciprocal treatment of cross-border banking groups.”
In the midst of agreements that have yet to be hammered out, there’s some harbinger of the question of cross-border access, courtesy of the derivatives markets and clearing houses. Over the weekend, the Financial Times reported that European banks are staring at a period of two weeks that stretch before their finding out that they may — or may not — have to start closing 45 trillion pounds worth of derivative positions that are tied to U.K.-held positions with the likes of LME Clear and ICE Clear Europe. Those firms hold and process the swaps positions that are held between parties in Europe. The FT notes that the EU must “formally recognize” the U.K. firms as being OK for trading derivatives. If they do that trading on their own, EU financial institutions would see billions of dollars’ worth of additional trading costs. The legislation governing these relationships, of course, has yet to be finalized.
Donne’s poem was written in 1624, but has resonance centuries later. To paraphrase another line from that poem, as lots of Brexit outcomes come out, the moment remains uncertain but the impact is certain to be widespread no matter what: Don’t ask for whom Brexit bell tolls, it tolls for thee.