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'No deal' fears are starting to rise again
A sense of nervousness is creeping back into UK markets. After weeks of relative calm, prime minister Theresa May's last-ditch attempt to get her deal through parliament appears to have backfired. The pressure on her to resign as the leader is probably the highest it has ever been, and it looks likely that she could stand downin a matter of days.
For markets, the key question in all of this is whether it increases the risk of a ‘no deal' Brexit at the end of October. Ultimately, we think the answer is ‘no' we continue to put the probability at around 20%. Our base case remains that little progress will be made before October, but that a further extension to the Article50 period is more likely than not.
But cast the question slightly differently will the perceived risk of ‘no deal' increase as October draws nearer and the answer may well be ‘yes'. The pressure on the pound is unlikely to abate just yet.
Theresa May's fourth attempt to get her deal approved has backfired
This week PM May unveiled a last-ditch attempt to get her Brexit deal over the line, by announcing she will bring forward the so-called ‘Withdrawal Agreement Bill' the piece of legislation required to translate the Brexit deal into UK law.
By promisingextra guarantees on the environment and workers rights, along with a commitment to a parliamentary vote on the final Brexit deal, she hoped to persuade a greater share of Labour MPs to come on board.
But within an hour of announcing the details of the bill, it became clear that the parliamentary arithmetic had not swung in favour of her deal and in fact, the numbers have moved backwards.
Conservative Brexiteers were alarmed by the prime minister's promise of a parliamentary vote on a second referendum and temporary customs union. At the time of writing,Buzzfeed News estimates that 42 Conservative MPs who voted for the deal in March, have said they won't do so now.
The stage is set for a new leadership election over the summer
Faced with another defeat, the prime minister may decide to pull the bill entirely to avoid another unnecessary loss. But either way, a new leadership contest within the Conservative party now looks like a question of ‘when' rather than ‘if'.
The process, which could take two to three months to complete, would have two stages. Firstly, the field of nominees would bewhittled down to the two most popular among Conservative MPs. Those shortlisted are then put to the party's membership to vote for their favoured candidate and if recent polls are correct, former foreign secretary Boris Johnson is miles ahead of the competition.
It is widely perceived that he as well as some of his competitors would be much more open to a ‘no deal' Brexit than Theresa May. This is one of the reasons why sterling has come under renewed pressure over recent days.
How the general public views the main Conservative leadership contenders? (YouGov ratings)
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A eurosceptic PM doesn't necessarily mean 'no deal'
In reality,a new eurosceptic prime minister would face the same Brexit hurdles as Theresa May.
Regardless of the Brexit stance of the new leader, we presume the first act of any prime minister would be to return to Brussels to attempt a renegotiation. Given that a new leader may not be in place until September (assuming the process rolls on for a couple of months), their first act may ironically be to ask the EU for more time to facilitate these fresh talks.
Either way, it's unlikely that new negotiations would achieve a vastly different deal. Don't forget that the majority of the withdrawal agreement relates to so-called exit issues. That's things like the UK's financial commitments and citizens' rights, neither of which are obvious candidates for renegotiation. Where the agreement does consider future trade the Irish backstop the EU has been clear this is not up for discussion.
At some point then, talks arelikely to break-down and at this point, a eurosceptic leader maydecide to push for a ‘no deal' exit. But given that there is no majority in parliament for this, we suspect lawmakers would do all they can to avert it. This is assuming that parliament continues to lack a majority for a different route for instance, a second referendum or customs union then the path of least resistance would be to try and trigger an election.
The leader of the opposition, Jeremy Corbyn, could initiate a vote of no-confidence in the government. This has happened before, unsuccessfully, but if ‘no deal' began to look increasingly inevitable, then it's possible that some of the more moderate Conservative MPs could leave the party and get behind the no-confidence vote. After all, given the government has such a slim working majority, it wouldn't take many MPs to do so.
The 20% no deal risk – why it is isn't totally out of the question
With MPs so against a ‘no deal' Brexit, it's tempting to conclude that this scenario is only a remote possibility. However there are two reasons why we think the risk of the UK going over the cliff-edge in October is stillaround 20%.
1
No guarantee the EU will grant further Article 50 extensions
As things stand, the general consensus isthat European leaders would probably allow another extension particularly if the extratime is to facilitate a 'democratic event' such as an election. According to theCentre of European Reform , some EU officials think another extension could only last until June 2020 - any later and the new EU budget may not be approved in time for 2021.
A further delay remains our base case for the time being, and this alsoappears to be the stance taken by markets. Six-month sterling risk-reversal contracts, which gauge thedirection investors think the currency will have moved by then, are much less negative than they have been over the past eight months or so.
However, there's a risk the EU's stance gradually begins to harden. France, in particular, has been highly resistant to allowing the process to go on for much longer without resolution. If the wave of UK MEPs from the newly-formed Brexit party seekto disrupt the process of appointing leaders to the top Brussels jobs over the next few months, there is a risk that this hardline stance towards further Brexit extensiondcould broaden out to other member states.
2
Accidental 'no deal' Brexit could happen, particularly if EU is resistant to further extensions
If MPs fail to trigger an election, they may still prefer to revoke Article 50 altogether rather than exit without a deal. While that may sound unthinkable, it could be spun as a ‘revoke to stop the clock and regroup' rather than to remain permanently. Don't forget that 191 MPs voted to revoke Article 50 back in late March.
The problem is that if the government of the day is determined to go for ‘no deal', then the legislative means of stopping it appear relatively limited. Earlier in the year, lawmakers managed to find a way of seizingcontrol of the parliamentary agenda, which culminated in the ‘indicative votes' process. However, aninteresting new reportfrom the Institute for Government suggests thatsuch an option may not exist this time around - and in fact, there is probablyvery little parliament can do to block 'no deal'.
Political pressure still matters of course, even if the legislative options are limited another reason why an eleventh-hour decision to trigger an election would remain quite likely.
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Author:
James Smith
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