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Curatia Analysis for Wed, Mar 13

Nexit: Potential Outcomes Following Brexit’s Latest Defeat

UK Prime Minister Theresa May’s Brexit deal suffered a second stinging setback in British Parliament Tuesday, lengthening the time horizon for a Brexit resolution and broadening the range of potential outcomes even as the original March 29 Brexit deadline approaches.

While those developments will likely stoke volatility in the pound and European markets, they have few practical implications for the UK’s beleaguered finance firms, many of whom have already triggered contingency plans for moving resources to the European continent.

Mrs. May secured last-minute concessions from the EU Monday in the form of assurances that the UK could pursue a legal remedy if the EU dragged its feet on redressing a temporary customs union at the Irish border, sending the pound more than 2% higher.

But those measures failed to reassure the UK’s Attorney General of the country’s ability to unilaterally break away from the EU. Mrs. May’s deal collapsed following the defection of her Northern Irish allies and euroskeptics from her own party.

With the March 29 deadline looming, action will come fast and furious in the days ahead. MPs will vote on a disorderly Brexit today — a proposition that has about as much chance of passing as a 50-pound kidney stone. Tomorrow will see a vote on whether to request a Brexit deadline extension from the EU — a measure that should pass as easily as...well, let’s just say it should pass easily.

What is less certain is whether the EU will grant such an extension, which would require the unanimous consent of all 27 of its member states. Some leaders have already voiced reluctance to grant such an extension without “credible justification.” That decision will be taken at the EU’s March 21/22 summit.

Mrs. May’s resignation, followed by new elections, is also a possibility, although her party had made no preparations for such an eventuality as of yesterday evening. And if the EU does approve an extension to the Brexit deadline, a second Brexit referendum could follow.

Given those hazy machinations, the pound figures to continue its bumpy ride after a sizable fall following yesterday’s defeat, with some analysts predicting swings as wide as 10%.

British and European authorities have taken several extraordinary measures to contain prospective damage from a disorderly Brexit. Last month, European regulators granted one-year licenses to London-based clearinghouses to forestall post-Brexit chaos in derivatives markets.

The Bank of England tightened liquidity requirements for some UK lenders in the run-up to a no-deal Brexit, which economists have warned could foment a crisis in the UK. To stave off that threat, the UK’s Financial Conduct Authority is preparing a Brexit “war room” for the weekend of March 29.

Financial firms in the City voiced exasperation over the process. One executive said the government had “‘wasted the last two years.’” Another predicted the continuing uncertainty would “‘continue to deter business investment’” in the UK and, by extension, prolong economic stagnation.

Our readers have shown little appetite for Brexit coverage in recent months, reflecting the depth of fatigue in financial circles.

That weariness has also manifested itself in decisions by City firms to spend “billions of dollars shifting staff and assets to outposts across Europe.” Prominents banks including JPMorgan, BAML, UBS, and even UK bank Barclays are among the hundreds of firms that have made moves, relocating an estimated £800B in assets to the Continent according to one estimate.

Analysts also proffered prognostications on the vote’s near-term ramifications for financial markets in the UK and Europe. Prior to Tuesday’s vote, betting markets had already pegged the odds of a Brexit delay at 85%. With markets now widely anticipating that outcome, any hiccups in securing a Brexit deadline extension could produce violent swings in equity and FX markets.

A no-deal Brexit, according to one sporting CEO, “‘would be an own-goal of historic proportions.’”