Don Quijones: Did the City of London Just Press the Panic Button on Brexit?

Lambert here: It seems odd that there’s so little discussion of the idea that extraction of the financial parasite that is the City would actually benefit the British body politic.

By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street.

In a sign of growing desperation, the City of London Corporation, the enigmatic city within the city that serves as the ultimate bastion of privilege in the UK, is now trying to appeal to brute populist sentiment to defend its position as the world’s most important financial center.

In a memo to the British Treasury, MPs, and financial institutions, the City’s Brexit envoy to the EU, Jeremy Browne, bemoaned that the French are pushing for the most damaging Brexit possible, even if France doesn’t directly benefit. The memo was duly leaked to one of the UK’s most anti-EU newspapers, The Daily Mail:

Browne’s recent meeting at the Banque de France was the worst he had had “anywhere in the EU”. The French, he said, “are crystal clear about their objectives: the weakening of Britain and the ongoing degradation of the City of London” and plotting to “actively disrupt and destroy” the UK’s financial sector when Britain leaves the EU.

France isn’t the only country aggressively trying to poach business from the City of London; so too are Germany, Spain, Luxembourg, the Netherlands and even Italy. But France differs from the rest in one key aspect, says Browne: it “sees Britain and the City of London as adversaries, not partners.” The recent election as president of Emmanuel Macron, a former investment banker at Rothschild & Cie Banque, has merely intensified this dynamic.

Paris has promised to unfurl the red carpet for the City of London’s highest paid bankers by offering low tax rates and bank-friendly legislation, including scrapping a proposed financial transaction tax, while also seeking to grow as a clearing center.

Clearing is a huge business for the City of London. The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day. It’s also home to roughly 90% of US dollar domestic interest-rate swaps. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc.

LCH functions as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. As Bloomberg reports, the role of clearing houses like LCH in global finance has become far more entrenched since the 2008 Financial Crisis and the inexorable expansion of derivatives trading.

For years the French government, together with the European Central Bank, has wanted a piece of the action. Ironically, it was the European Court of Justice (ECJ) — the same court whose jurisdiction the UK government is now determined to elude — that, in 2015, stopped that from happening on the grounds that the ECB cannot discriminate against an EU member. But if the UK leaves the EU, and thus the ECJ’s jurisdiction, that ruling will no longer be applicable.

If the City’s euro-denominated clearing operations are relocated to the continent, there’s a risk that other operations will follow in their wake. That could be a major problem for a country that has grown so dependent on the financial industry. Almost 2.2 million people work in financial and related services such as accounting and law, two-thirds of them outside London. They produce nearly 12% of the UK’s GDP, 11% of its tax take, and a net trade surplus of £72 billion ($104 billion).

One of the glaring ironies of the Brexit debate is the extent to which the UK has benefited from the creation of the euro, despite not being a member. Since the creation of the single currency at the turn of the century, Britain’s share of key financial markets has exploded. London is now home to almost one-half of the entire global interest-rate OTC derivatives market, compared to 35% in 2001. Its share of global forex turnover increased from 33% to 41% between 2001 and 2014. And its share of global hedge fund assets doubled, from 9% to 18%.

A disorderly exit from the EU will at least stall, if not reverse, these trends. Given how much is at stake, it’s no surprise that the City of London Corporation was one of the largest backers of Project Fear, the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of Brexit in the lead-up to last year’s referendum.

So, too, were many of the global banks operating in London’s Square Mile. By having a large base in the City, global financial institutions get the best of both worlds: they get both EU “passporting rights” — that is, the ability to trade across Europe — as well as the ability to engage in activities that would be unimaginable in most other financial jurisdictions, including New York. The banks and other financial institutions would much rather that the status quo remained unchanged, as, too, would the City of London Corporation, Britain’s state-within-a-state. As such, it’s too early to write London off just yet.

But if things have to change, the banks will make sure it’s to their advantage. And France’s government seems determined to lend them a helping hand. “We want Paris to become Europe’s new number one financial hub after Brexit,” French Prime Minister Edouard Philippe said, speaking in English to an audience of financial executives. As Reuters reports, France will have its work cut out trying to convince businesses that these changes are for the long term.

Be that as it may, it is still a sad sight to see the governments of some of Europe’s largest nations bend over backwards to court the attention of the City of London’s biggest patrons — the same institutions that were responsible for many of the worst financial scandals of the last ten years. Rather than seizing this opportunity to stifle the malign role that the City of London plays in the global economy, most European capitals are now determined to emulate it.

A surprisingly large number of people still have a strong sense of attachment to physical money, particularly in Europe’s most important economy, Germany. But the IMF has suggestions on how to win the War on Cash. Read… People Not Amused by EU Efforts to “De-Cash” their Lives

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Expat

    Good point about Europe wooing the City to relocate to the continent. It’s all about jobs and money, of course. This blithely ignores congestion, housing inflation, and the unpleasant reality of having a bunch of bankers invade. Politicians are, as we know, assholes who can see only as far as the next election cycle and who measure success by MORE, so this is not surprising.

    Why not invite the Mexican and Colombian drug cartels to set up shop? Much more money with much lower infrastructure costs? The people involved are pretty much the same anyway.

  2. Terry Flynn

    Am in two minds (yet) again about this issue. On the one hand we desperately need rebalancing of the economy which inevitably means a degree of cutting the City down to size. On the other hand a major dislocation caused by an exit of the major firms is not to be looked upon lightly. Of course, if one tends towards an MMT-type perspective then the “loss of GDP” figure might be nonsense in terms of real well-being if an enlightened government simply spent in the areas with spare capacity to stimulate non-inflationary growth – and whilst yes, some people will physically move abroad, as noted, there are lots of accountants and other professionals who’d still be here and are real resources….granted they may need some encouragement to use their skills in more socially beneficial ways…… ;-)

    1. Terry Flynn

      oh and another thought occurs in the light of a comment PlutoniumKun made in the last 48 hours – the huge effort Dublin is making. A native English speaking base for a bunch of people who are notoriously lazy when it comes to foreign languages is (IMO) a major benefit (as I’ve seen others say before on NC).

      Now, of course, France/Italy/etc would do whatever’s necessary to grant citizenship to ‘prized bankers’ but in terms of minimising political fallout any country would prefer to accept a bunch of new people via means that already exist and are generally acceptable rather than ‘something cooked up anew by the elites’. Here, I simply wonder what, for a bunch of City-based bankers, entitlements to nationality of EU27 countries look like? I, for instance, as you might guess, although British born-and-bred, have automatic rights to Irish citizenship (if I do the paperwork and stump up the non-trivial processing fee). I am guessing (but am happy to be corrected) that a disproportionate number of people in finance could qualify for Irish citizenship where (under existing rules) they wouldn’t for any other EU27 country.

      Finally, I wonder if permanent residency-vs-citizenship issues might arise? A lot of people (and me included at the time) obtained Australian ‘permanent’ residency in my early years there (in order to qualify for submitting proposals to the two main grant-funding bodies). But changes in the law a few years back were initiated – the small print on the PR page stuck into my UK passport indicate the right to stay in Australia permanently and unlimited right to leave-and-return for five years. Which, in theory, meant if I stayed in Aus with no foreign trips everything was fine and dandy. BUT ANY foreign trip after the five years was up meant that Australia had the right to deny me re-entry. I learned that this change in the rules was due to finance people abusing it for tax purposes to help banks(!) Thus, though in terms of practical day-to-day rights it made no difference (except I couldn’t vote or be called for jury service), I went all the way and got full Aussie citizenship – since at that time I fully expected to carry on doing a lot of foreign travel for years to come. But it shows that governments can sometimes get canny with regard to the new regulations they implement regarding residency. I imagine bankers would look rather closely at the small print of what was on offer from any EU27 country.

      1. PlutoniumKun

        Just on that topic, Ireland of course has an advantage in that historically there have been pre-EU agreements regarding easy travel between the UK and Ireland, and of course very many UK people qualify for Irish passports (there has already been a massive surge in applications for Irish citizenship). The Irish government is perhaps the most liberal in Europe when it comes to dishing out passports and long stay visas.

        I linked yesterday to a presentation given by the Irish Treasury Management Agency (NTMA), to foreign bond buyers. Its interesting that they are not predicting a huge inflow of investment from Brexit, and note the major constraint is housing supply in Dublin, there just aren’t enough houses to go round (part 3 of the presentation). There is, though, plenty of office space capacity available – more than in the alternative cities.

        Anecdotally, another issue for US/UK staff (I know a few Americans here who work in the finance/IT area) is schools. Irish schools are generally very good and the education is similar to UK public schools or good US private schools, so thats a major attraction for the expats I know with families.

        1. Terry Flynn

          Thanks – yeah it was that presentation you drew attention to that I had in mind when making my comment.

          re schools – yeah my mother always likes to bring up this point. She was born and bred in Ireland (and as such, actually is the ‘stronger’ claim for me to claim citizenship, although I’d qualify purely on the grounds of an Irish paternal grandfather too).

          Anecdotally, close relatives of my mother living in County Dublin claim there has been a lot of land banking going on (as the housebuilders/retail chains in the UK have been accused of doing) and that in reality, were there the political will, the amount of residential housing need not be a constraint across County Dublin (as opposed to merely the City of Dublin). I reckon they should do what researchers in Australia did and get access to water bills and simply counting lights in windows across a load of “occupied” residential accommodation in Melbourne – hey presto, huge numbers of actually unoccupied homes 365 days a year :-)

          1. skippy

            We have about a million homes that are not primary residential occupancy.

            disheveled…. thanks FIRE sector…

            1. Terry Flynn

              A favourite pastime of mine when living in Mosman, Sydney (renting – of course – even if I’d made full professor when there I could never have bought) was observing the 12 storey ‘residential’ block opposite my balcony. I’d count up which apartments were lit more than 2 weeks a year. Only one third of the apartments were clearly continuously occupied and most others were occupied for less than a fortnight per annum. Furthermore a visiting semi-retired professor (Canadian but grew up in UK) took to renting an apt in his twice yearly 3 week stays (liked to gossip with me and get a good cuppa tea) and he confirmed that even *just* that one owner he rented from typically gave him quite a choice of apartments, no matter whether it was a popular time of year or not.

              The location was ideal as a 2 minute walk down the hill to the ferry got you into Sydney’s CBD in less than 20 minutes total journey time.

              1. PlutoniumKun

                The form of ownership matters a lot. There has been a complete switch over in Dublin from multiple small landlords in apartment blocks to institutional owned rental blocks (mostly because NAMA, the bad bank, found it easier to sell off celtic tiger era blocks to this type of investor). The former are often left empty for a wide variety of reasons (usually, the complexity and cost of getting tenants at certain times of the years, or just laziness on behalf of the owners) – in contrast, instutitional owned and run blocks are milked for all they are worth with 100% occupancy the ideal. A friend lives in one 180 block complex near the Phoenix Park and the agent there told me an apartment is never left empty for more than a few days. They charge whatever the market will bear, so there is a constant change in rents (usually upwards these days).

                The big focus now for developers in Dublin are ‘student’ apartment blocks. They are popping up like mushrooms, often in what are generally considered undesirable areas of the inner city. Because they are for students they are allowed substandard space and light requirements. The attraction for investors is that they have a guaranteed rental yield during term times, while they can then take on holiday and business short lets over Easter, Christmas and the summer. Very profitable as you can imagine. I’m in two minds about them – on the one hand they could represent a new form of slum in the long term, but for now, they mean precious urban land is used very intensively and they are bringing a lot of life to run down areas.

                1. Terry Flynn

                  Thanks – very informative as usual.

                  I find it interesting that universities in the UK are moving in the opposite direction: accom is streets ahead of where it was in my time (even with me attending ‘rich’ universities). Now all student rooms are ensuite so that during non-term time they can be used by visiting FIRE types and be suitable for conferences catering to the same sort of individual.

                  1. PlutoniumKun

                    Yes, it took a while for the penny to drop with major investors, but any type of student accommodation is very profitable if you can rent them out at term time. The big difference between UK and Irish universities is that most of the Irish ones tend to be on smaller campuses (less like the suburban or small town 1960’s Uni’s in Britain), so they have very little room for on site accommodation. Also, student grants have always been less generous, so most students go in their own towns. So the push for investment has come from outside investors with land close to existing colleges, not the colleges themselves.

                    While its not ideal, I well remember the horrible student bedsits of my day – the modern ones are far nicer, and as I said, they are very intensively used, so they are bringing life to what were pretty grim parts of Dublin, Cork and Limerick.

          2. PlutoniumKun

            There is a lot of land banking around Dublin, and its not just the private sector – the government ‘bad bank’ (NAMA) has ‘allegedly’ been hoarding sites in order to drive up prices. Its primary role is to recoup the bank losses, and unfortunately its seen this as more important than releasing land according to demand. A lot of sites are also still tied up in legal knots as part of the aftermath of the crash.

            Interestingly, even the current right wing FG government has acknowledged that its an issue, and is bringing forward a tax on derelict sites. I was discussing this recently with a local councillor, of the right wing, pro business type, and he was surprisingly receptive to it, its become such an overt problem that the obvious solution to it can’t be denied.

            But even if more land is released, it won’t solve the problem quickly. There was a huge destruction of construction capacity after the Celtic Tiger, the industry is already stretched to the limit (there are three major apartment developments under construction within 500 metres of my home). A family member is in a small construction engineering company and they have stopped bidding on work, they are stretched to the limit and they can’t get suitably qualified employees (many are in Oz or Canada, and happy to stay there). The money is flowing, there are lots of sites with planning permissions, but with the best of will it takes 2-3 years to go from ‘finance/planning permission’ to occupied houses.

      2. lyle

        To boot Ireland has a common law based system, as contrasted to the civil law based system on the continent. So that bankers can operate under a legal system they are familiar with. Continental countries are talking about setting up courts that operate on a common law basis for banks.

    2. PlutoniumKun

      I think that in an ideal world, Brexit would hobble the City of London and allow a new left wing government to use MMT to create a better more equal society. But I would fear that the real world situation would be that if you combine a spending MMT environment with a weakened economy and a dropping sterling, the result would be out of control inflation. Historically, hyperinflation has occurred when countries have combined a sudden loss of productive capacity with weak monetary controls, and I think that is exactly the situation a really bad Brexit could produce. I’d be interested to know what those with more technical knowledge of MMT policies than I could input into this – I really doubt that MMT is a magic solution to the sort of problems a Corbyn led government could face in, say, 2 years time in the aftermath of a botched Brexit.

      1. Terry Flynn

        hyperinflation has occurred when countries have combined a sudden loss of productive capacity

        Indeed – I feel similarly in that whilst I like MMT, I don’t generally feel technically competent enough to argue a case on MMT grounds (except for the demonstrable cases that are used to support the point you make – namely Zimbabwe and Weimar Germany and their respective losses of capacity). Thus I share your concern that a government would have to be exceptionally careful to avoid such problems that a sudden loss of significant capacity could produce.

      2. Darn

        The 2017 manifesto said they would use conventional govt borrowing, and would balance current spending over the life of the parliament but do extra borrowing for investment

        1. Terry Flynn

          yeah the borrowing for investment could be good, could be bad, depending on how nimble a Corbyn govt were in rapidly getting to grips with the real remaining productive capacity of a post-BREXIT UK. (I’ve made a slightly longer comment to this effect as a reply to PlutoniumKun agreeing with him but it’s in moderation).

      3. vlade

        there are two problems, one of flow, one of stock.
        The one of flow is that the UK HAS TO trade (import at the very least). That’s not negotiable – UK can’t feed it’s population as is, it has to import oil, etc. etc. Even if it was to move to producing things, it doesn’t have that much base ingredients that it could survive on its own w/o trading.

        MMT won’t help you with external trade. It can’t – it talks about how things flow, not what you’d do to get someone to trade with you. So using MMT to get an army of nurses/doctors to save NHS doesn’t solve the problem of feeding and clothing them – you need to trade for that. Unless the selfsame doctors/nurses also become “exporters”, it doesn’t help with paying for the exports either (money that you create to pay them will be given to external investors, to fund the imports, and those will ask more and more returns if they can’t sell reasonably – GBP is not global reserve currency people would be happy to hold regardless). UK is not a closed system.

        So you’d have to build something someone external will buy and your current account gets a bit balanced.

        This is where the second problem comes. The majority of the wealth the UK has right now is not very productive housing, where people traded houses like tulip bulbs. Which means you pay, for a crappy UK house, multiple of what you’d pay for a house of the same or better quality on the continent. Foreigners started to participate in this game, which drove a lot of UK’s current account deficit (along with banks, but that more or less washes up when it doesn’t end up in more mortgages.. But Oz/NZ has a larger problem there).

        Once this game of shells ends, the UK’s current account deficit becomes untenable (and it’s starting to look like that already). So you don’t even have anything to sell to the external funders now.

        This will translate into GBP tanking even more. At some stage, UK can become cheap enough to ignore the effects of EU tarriffs etc., but it has some way to go there. Because it will be still better to investors to spend money in EU CEE countries, where you have (still) cheaper labour, advantage of the EU market, and more educated skilled/workforce.

        The problem of Brexit is that it will bring all of this as an abrupt shock, with very little absorption capacity – especially if the brexit is hard (and that includes the finance industry departing overnight, hitting lots of parts of economy that rely on its spending – direct, or via employees).

        UK is too small for it to be able to do Brexit well, and too large for Brexit to have relatively little impact.

        1. Terry Flynn

          Thanks for that. As I mentioned, I like MMT but tend to get a bit lost when the intracacies of international trade are introduced. Whilst Bill Mitchell can write some very pithy take-downs of the orthodoxy, his posts are often quite long and dense and time pressures mean I don’t get to absorb them. And his ‘trade doesn’t matter’ line (which I’m slightly over-simplifying – he DOES explicitly acknowledge that an economy without *real* resources to trade is in trouble) with regard to BREXIT specifically always makes me a tad uncomfortable – I get the impression he isn’t up on the practicalities of the ‘restructuring’ needed.

          My gut feeling – and am happy to be corrected – is that we could feed and clothe everyone…but that the problem is that we’ve become too addicted to foods that we import when they’re ‘out-of-season’ here and suchlike. A re-orientation towards what we can and do produce in quantity would solve things, but as everyone here seems to acknowledge, such a re-orientation would be painful and has a lot of potential to cause inflationary bottle-necks in the short-run and extreme dislocation as we adjust to a new economy.

          1. vlade

            I don’t think you could clothe everyone, even if the everyone accepted to be clothed in wool or hemp, which would be more or less the only two options (oh, and leather :) )

            You could feed everyone, if you severely limited the diet, while the costs of food going up or introducing rationing. I doubt people would like it though. It would also involve getting most of the oil that the UK can still produce to agriculture/transportation (which would probably mean nationalization of the industry) and/or allowing fracking.

            Essentially, you’d have to put the UK on a semi-war footing.

            Also, I believe that a lot of the UK land is now marginal from overuse (basically being farmed for centuries, taking out some critical trace elements) too, so it’s a question how good the diet would be long term.

            1. Anonymous2

              Last time I looked into this I concluded that the UK would have to become largely vegetarian if it were to stop importing food. At that point I am fairly confident that the UK population would say ‘the Brexiteers never told us this would happen ‘. I doubt it will get to that stage, however.

          2. vlade

            The problem with restucturing the economy is that it’s very easy to say, but much harder to achieve.

            The European example of that are the countries of the former Soviet bloc post 1990. Most of them had a very weird (from a number of views) economy, that was hit by a sharp shock in 1990s, when they found that most of what they had was basically unsellable in open world markets, and at the same time were cut-off from subsidised imports from the Soviet Union (oil, iron ore etc. etc.) and forced to pay world prices for that.

            It took most of them a good part of 90s, I’d argue even going into 00s to sort that all out. Real incomes took at best 7 years to recover (at one stage being 30% down, yes 1/3rd down!), arguably a decade – and that was when there were massive external investition from mid 90s.

            New Zealand took about 20 years to re-do its economy (which was paradoxically hurt by the UK entering EU and having to cut preferential trade ties with it) etc. etc.

            I’m not aware of any economic restructuring that was painless and quick – except the theoretical ones that economists of most stripes like to talk about.

            It’s possible, but it takes a lot of time, and not a small amount of pain. UK public is unused to the pain, and very explicit in all polls that it doesn’t want to take any Brexit pain (and, at this stage, quite a lot of them, IIRC about 40% don’t expect to feel any pain)

        2. PlutoniumKun

          Thanks for that, your elaboration makes a lot of sense to me. One thing that has surprised me is how stable sterling has been since its initial drop after the Brexit vote. It seems to me that in almost any likely scenario over the next 2-4 years, sterling will come under a lot of pressure. Its not just Brexit, as you say, the current account deficit looks untenable and there is plenty of evidence that the property market is in an unstable bubble situation, not to mention the government doing its best to make the Italian political system look good. I keep wondering if currency traders are assuming (or know) something I can’t see.

          1. vlade

            few currency traders have horizon longer than a couple of months.

            And most of them got Brexit spectacularly wrong.

        3. skippy

          The Achilles heel of it all is ones CAD, tho it is important to take time frames into perspective [hyper reporting and sediment are problematic e.g. mercenary shorting GFC].

          disheveled…. my concern is transaction speed.

      4. H. Alexander Ivey

        Historically, hyperinflation has occurred when countries have combined a sudden loss of productive capacity with weak monetary controls,

        A quibble here, but I would argue that hyper-inflation happens when the people in a society loses faith in their government and thus, in the government’s ability to provide an accurate measure of value (i.e. money). That might happen with Brexit, but from a halfway ’round the world view (Singapore, rather than Lambert’s 40,000 foot altitude chair) I would bet on depression resulting from a loss of productive capacity (which gives rise to unemployment and thus less money to most people-no wage) coupled with a loss of monetary supply (no credit & no cash for most people, and the government will not provide any c&c directly to their people). Prices collapse due to the lack of demand (no money, no honey) and they continue downward due to the Fisher’s phenom-people’s debt doesn’t adjust downward with their economic outlook, but their spending does).
        There, not a bad job of name-dropping and half-baked analysis, first thing in the morning. Now let me finish my coffee and renumerate my fallacies and mis-statements at the morning break.

        1. vlade

          I tend to agree. I doubt UK will suffer hyperinflation, although I suspect it will get a bout of high inflation (I would expect around 5-10%, but may be more) but not lasting that long as it’s going to be due to a sharp GBP correction mostly.

          As I noted above, I believe that the main reduction in the UK wealth will be (apart from the weakness of GBP) crash of the housing market. The counterargument is that the Chinese will buy more as sterling drops, but the question is, will they, really? That part of the market is already cooling down from what little I can see, and given it was already propping a weak market, which is going to be hit by the middle-class-in-South-East dependency on above-average wages in financial sector (direct and indirect), I don’t see anything pretty there.

          1. Terry Flynn

            Well, the reply you’ve just given seemed (to me) to be less awful in implications than the one you gave earlier….and (IMO) would be more easily coped with by politicians than the doomsday scenario…..I know, this is conjecture and a case of ‘which of a number of awful scenarios’ but gives me a smidgen of hope (perhaps misplaced, but it’s a sunny Friday morning here….)

            1. vlade

              Well, my base scenario is:
              – hard brexit w/o any agreement
              – next day, GBP tanks 10-20%
              – then it depends on what EU will do. Assuming nothing much (the worse scenario):
              UK inflation skyrockets. I’d say about 30-50% of the sterling crash will translate into inflation, although at high numbers this may become non-linear (say if sterling crashes 50%, then I could see inflation as high as 30-40% easily enough).

              BoE attempts to rein the inflation in, as extra 1% on mortgages hurts people less than 5%+ inflation across the board (w/o any wage growth).

              Finance industry exodus accelerates (it will already be in high gear if there’s no clear agreement by the end of the year) and/or finishes, killing SE of England, leading to a property crash – exerbated by the BoE rate raise.

              Recession bordering on depression ensues, with a lot of political chaos.

              TBH, I’d not predict any political stuff here, as at this stage people might have very well decided to go and hang all UKIPers on the lamposts. Or not. The only prediction I’d made here is that the Tory party splits, and the centrists part of it may merge with LibDems.

          2. PlutoniumKun

            Just to say that I wasn’t predicting hyperinflation, I’d consider it unlikely. I’m just suggesting that the base conditions for hyperinflation are there in a worst case scenario – i.e. a serious loss of productive capacity combined with loose monetary/fiscal policy. I don’t see the latter occuring under a Conservative government – they’d rather have half the country unemployed than see inflation hit double figures. But a Labour government might miscalulate that way.

            I don’t think the Chinese can come to the rescue of the housing market, simply because the Chinese government has seriously closed off outflows of capital. But there are plenty of opportunists from other countries who might see a sharp fall in sterling as the perfect opportunity to invest in British (or more precisely London) property.

    3. Steed

      We touched upon this issue briefly with Lambert at the London meet up last month. Having worked in the City since the late 90s, I think moving physical and technical resources to the continent will be the easy part and appears to be well under way. Harder for people I think, as personal ties, family children etc would make a wholesale move to another country difficult and disruptive. A lot of middle level professionals ( accountants, managers, lawyers, IT personnel ) will be looking at large pay cuts if they move out of finance into other sectors if they choose to remain in the UK.
      Regarding the elite bankers, traders and others who probably will move, I’m reminded of some dialogue from Scarface where a US immigration official fumes at a young surly Tony Montana, about Fidel and Cuba ‘flushing the toilet’ and the effluent ending up in Miami.

      1. Terry Flynn

        Yeah the cultural norms thing is not to be under-estimated. (See the article in today’s links about the “wrong” questions to use in opening up a conversation.) I knew i was in trouble in Sweden when Swedish colleagues warned me that the university was not really setup to integrate even people from other parts of Sweden, let alone anglos and southern europeans. I encountered lots of lovely natives who recognised the limitations of the system they were working in but had zero ability to change things in a meaningful way. It was a shame because the basic Swedish model (allowing you days to just sit and think and be judged on longer time horizons) was what Anglo universities had lost and what is ultimately the more successful model.

        It’s why I think there will be immense pressure from the individuals concerned to relocate to Dublin (housing problems notwithstanding) rather than a country in mainland Europe with quite different cultural norms.

  3. PlutoniumKun

    A number of issues here:

    First off, it seems strange that the British have been taken by surprise by other countries seeing Brexit as an opportunity. Everyone, including Remainers, seemed to think that negotiations would be dominated by decent chaps seeking to minimise the damage to everyone. But both France and Germany have deep mercantilist traditions. They’ve never bought into the ‘everyone benefits from trade’ arguments. Deep down, they see it as a zero sum game, with the most ruthless operator the winner. And the UK has made itself vulnerable. I’ve no doubt that as the next 18 months go by we’ll see a ratcheting up of pressure by Europe to panic UK based banking and manufacturing companies to move. I don’t doubt we’ll see moves to change the passporting rules to prevent ‘nameplate’ moves by companies to Paris or Frankfurt. They want the jobs – all of them.

    As to whether the UK will benefit from a weakened City of London, I think that ship has long left port. The UK economy is just too dependent on finance, it would take decades to build up real alternative industries. I think the key issue is not direct jobs, but property. Substantial damage to banks and an outflow of well paid people could cause a property crash which would hit the other big industry of modern UK, selling homes. In any event, if a hard Brexit goes through, the political pressure will not be on controlling Finance, but in letting it rip entirely, removing what little regulation there is to ensure a constant flow of hot money.

    1. Colonel Smithers

      Thank you, PK. Spot on, as always.

      Further to discussions at my German TBTF and with friends / former colleagues dotted about the City and its peers on the continent, City firms are hanging on until the end of the year before defaulting to / switching on a / moving up a gear to a hard Brexit solution.

      The least complicated solution is to rebook trades etc. at EU27 centres, e.g. Amsterdam for tax reasons, and move the front office to EU27, and may be novate from English law as a governing law, but leave the middle and back offices, including control and risk management functions, in London. There are accounting and capital issues to be resolved with such moves. However, it’s expected that EU27 will expect / insist that a fair bit of what is left in London migrate within a few years. 3 – 5 years have been suggested. It’s also suggested, including by Bruegel’s Nicolas Veron, that, in the event of a hard Brexit, the EU27 will offer a transition period, as much to protect itself as to give the UK time to prepare for that hard landing. Unfortunately, there are elements in the UK, mainly hard Brexiteers, who are banking on such unilateral concession. The extent of that fire that will soon engulf Blighty is just not appreciated, especially as the UK MSM can’t get enough of Trump.

      Despite what many think / expect, the Bank of England / Prudential Regulation Authority has not been involved much, but has been content to let the Financial Conduct Authority, the consumer protection and markets regulator, lead on Brexit. However, the scale of reauthorisations, especially for banks that will become third country branches from EU branches, including my employer, and the application of rules, such as senior management accountability and client assets protection, has dawned on the Bank / PRA. Almost weekly from last month, the Bank / PRA is having meetings with the big banks, not just UK, that have City operations.

      1. Colonel Smithers

        I forgot to add that, with regard to PK’s last sentence, the (better) City thinkers don’t want that. It’s very much a minority view. May be, Tory neo-liberals who think they know business think that.

  4. kk

    The super-rich banks/financial types don’t want brexit. Only the poor and old voted for brexit. The Conservative party is the party of business and the party of government and is leading brexit. Consequently, brexit will not happen, we will not crash out, nobody here in the U.K. is preparing in any way for any change. My advice to our overseas friends is just to ignore the whole thing

    1. Yves Smith

      Do you not read the press9? It was the Tories and UKIP that were pumping for Brexit. The UK press barons, particularly the Torygraph, have been backing it firmly. May has been going the “hard Brexit” route. The press and Government ministers have all been taking a hard Brexit line until the last few weeks, when they’ve finally come to the realization that the EU holds the much better hand.

      And Tories voted 58% for Brexit while Labour voted 63% Remain”

      On top of that, there is no way out of Brexit unless 27 members of the EU agree to let the UK back out. To do that, the UK will need to grovel and almost certainly give a big concession, such as giving up the rebate on dues that Maggie Thatcher negotiated. So a UK that stays in the EU will have a worse deal than the one that was supposedly so bad it had to depart.

      Labour has also repeatedly taken the position the “Brexit means Brexit” although it favors a much less draconian sort.

      Given the referendum, the only way the Government can back out is with another referendum. The Tories won’t ask for one unless there is a leadership change and Phillip Hammond becomes PM. Even then, that would be an uphill battle for him. The Tories won’t risk a new snap election. And as much as some Tories are now very concerned re Brexit, they do not want to risk a change in government, since having Labour in to them is an even worse outcome than Brexit.

    2. vlade

      This attitude is the reason why the UK will wake up in 20 months and won’t be able to even fly over Europe

      1. Colonel Smithers

        Thank you, Vlade.

        This sort of thing does not get any air time. It’s what Trump had for breakfast that interests, or is it amuses, the public, or so the MSM would have us believe. It’s the same with food and healthcare.

        I hope there will be a reckoning with the MSM when, or if, this is over.

        1. Terry Flynn

          Yeah I posted a comment in the last few days on this topic saying something to the effect that it’ll be bread and circuses that cause the backlash – Brits will simply blame ‘perfidious Europeans’ if a load of foodstuffs disappear from ASDA but it’s when their 2 weeks in Ibiza become impossible/horribly problematic with customs etc that the backlash will happen.

          Of course (and what I didn’t make clearer when I first made the comment), this presupposes a hard BREXIT and no guarantee we can ‘get back in’ to the EU. I think that although the EU’s own rules only allow reversal of article 50 if all other 27 members agree (and BEFORE formal exit), I think (in classic EU fashion), that the EU would find a way to fudge this so as to interpret it as ‘allowing a quick re-entry’…MINUS all the benefits like the rebate etc. Whilst I agree that the ‘EU needs us at least as much as we need them’ arguments are silly, there’s one thing that will be preying on the minds of EU leaders – the budget. If the UK walks away and pays nothing (cutting off its nose to spite its face), then the EU27 face some uncomfortable rebudgeting – and letting us back without any of the previous benefits would both solve the budget issue and demonstrate to others the futility of trying to exit.

          1. PlutoniumKun

            My guess is that the sort of real pain that Brexit has the potential to inflict on regular voters will be too late to change things – I suspect that most people won’t actually believe the dire scenarios unless and until they actually happen, and that will be on or around the final severing of links. By then, there would be no legal way to go back, even with a massive fudge.

            Bar an economic catastrophe before 2018 I honestly can’t see what sort of scenario could lead to a course reversal. A very large chunk of the Tories are true believers, they will not allow any Tory PM to reverse, and I think that even if the government collapsed and Corbyn came in, it would be hard politically for him to reverse it too, if he wants it (I suspect he is a much more commited Brexiter than he lets on). Reversing would be a huge humiliation for a major chunk of the UK establishment, from government to media. I just don’t see the circumstances that could allow it to happen.

  5. Colonel Smithers

    Thank you, Lambert.

    I know, and have worked with, some of the contributors to the fish and chips wrapper Jez Browne was touting.

    “France isn’t the only country aggressively trying to poach business from the City of London; so too are Germany, Spain, Luxembourg, the Netherlands and even Italy.” Italy, much to the chagrin of Italians based in London and lovers of that fine country, is hardly at the races. Malta, Sweden, Poland and Lithuania, and even off-shore mini-me parasite Mauritius, are putting bigger efforts than the Azzuri. Spain is putting in a bigger fight than expected, especially for buy side business, and, within Germany, Berlin is giving Frankfurt a run for its money. France and Spain allow applications for authorisation in English, are translating their rulebooks into English and simplifying them, and are offering to lobby on regulatory matters on behalf of firms wishing to migrate. Needless to say, big finance scents an opportunity.

    Talking to recruitment agencies in the past couple of months, for my own parachute and my employer’s recruitment needs, the market is drying up and they are laying off staff. Smaller professional services consultancies are shedding staff. I am hearing the same about law firms and engineering consultancies. The middle classes in the London commuter region are about to face the desolation that mining, steel, automobile and shipbuilding communities in the provinces faced a generation ago. These decimated communities had some community spirit and managed to weather some of the Thatcherite storm, but I don’t think the south east of England is so equipped.

    I have written about friends and colleagues applying for Irish citizenship. I have colleagues applying for Austrian, due to the wife being the granddaughter of Jewish refugees, and French nationality. There are many people with origins in the UK’s port cities who are the descendants of European sailors etc.

    1. Terry Flynn

      Thanks very much for those insights.

      The middle classes in the London commuter region are about to face the desolation that mining, steel, automobile and shipbuilding communities in the provinces faced a generation ago. These decimated communities had some community spirit and managed to weather some of the Thatcherite storm, but I don’t think the south east of England is so equipped.

      Quality of life studies show that ‘atomisation’ of society causes shocks like adverse health events to have much larger effects upon quality of life. Thus, I agree with the idea of resilience you mention in the Midlands/North (and indeed I showed it within a ‘southern’ city – Bristol – at the level of the electoral ward) in follow-up analyses to a published study. Pretty GIS graphs a colleague did showed that wards hit by deindustrialisation don’t do as badly on individual level quality of life measure as the ‘official’ measures of deprivation – and it’s because of strong ‘connections’ and ‘social capital’ (to use an economic term I dislike but which is useful in this instance). Conversely, young people without such connections are hit surprisingly hard by shocks to their lives.

      Thus I too wonder what the implications will be if there is fracturing of society in the ‘me me me’ areas of Southern England that have previously benefited from the dominance of the FIRE sector. (Delete if this appears twice – mistakenly didn’t mark first attempt as reply to Col S).

    2. makedoanmend

      I sent my application for Irish passport renewal this past Tuesday in Glasgow at the post office. Whilst waiting, I asked the clerk if there was still a bit of rush for Irish passports. She showed me six applications for Irish passports that has already been lodged by 10 a.m.

      She indicated that there was a mad rush after the initial Brexit vote but the volume of Irish passport applications had returned to somewhat normal levels after several months.

      However, she said since the last election she now routinely processes more Irish passports than UK passports these days!

  6. Jim A.

    It seems to me that in a hard Brexit, the elements of the city that prey on Britain would have to stay. It’s the majority that prey on the rest of the EU that will be forced to leave. It is the fact that those parasites were reluctant to share with the non financial parts of the UK that led to the Brexit vote succeeding.

  7. pictboy3

    I saw an article in the Guardian a few months ago mentioning a British trial balloon regarding security cooperation being used as a bargaining chip in Brexit negotiations. The EU side seemed to balk and since then I’ve seen absolutely nothing about it. I’m an American, so I don’t have easy access to Euro news sources, and might be missing the news on it.

    Is this being discussed at all? It seems like the UK has no economic leverage whatsoever, and this is about the only area that could really cause some pain to the EU if they were to pull out in response to a punitive negotiating stance, so it seems weird that it wouldn’t at least be on the radar.

    1. Colonel Smithers

      Thank you, Scot.

      You are right about that bit of kite flying from May. The UK has few chips, so the barrel has to be scraped.

      It’s not being discussed at all. A friend, a diplomat at the UK mission to the EU, thought that picture of the EU27 and UK delegations meeting on Monday and the UK delegation having no notes was closer to reality than imagined / expected.

      Don’t worry about the discussions. If the UK MSM is any guide, we just care about who your president has insulted.

    2. PlutoniumKun

      I think the trial balloon about security issues was well and truly shut down by the spate of terrorist attacks in London and Paris. Raising it was seen by Europeans as being in very bad taste (and more evidence that the British government is out of its depth and flailing), and it was quickly realised by the government and its media cheerleaders that if they followed through on the threats, and there was a big terrorist attack in the UK, it would be politically catastrophic.

    3. vlade

      the trial shown the baloon to be stealthily made by polish plumbers of plumbium. the saboteurs!

  8. Synoia

    May’s mistake was twofold:

    1. Underestimating the degree of interdependence in the EU and the effort of undoing 40 years integration into the Common/ Market/EU.

    2. Setting a hard deadline for triggering Article 50, without having a detailed, costed plan for the process, and because it includes IT projects (which are always research projects and thus not amenable to fixed deadlines), a significant buffer for the inevitable “oh that’s a change, it’s out of scope.”

    We are at the “Nine women in one month, cannot a baby make” stage, and by reviewing the six steps of project management, we can determine the exact phase of the project:

    1. Enthusiasm,
    2. Disillusionment,
    3. Panic and hysteria,
    4. Hunt for the guilty,
    5. Punishment of the innocent, and
    6. Reward for the uninvolved.

    We are entering (3).

    What does surprise me is that the Tories did not understand the dependency between the EU and the City of London’s money industry.

    1. Andrew

      Yeah, this is one I don’t get either, considering the cosy links between The City and The Conservatives and all they’ve done for them since Thatcher’s Big Bang in the late 80s. Dave Cameron killed the UK’s golden goose.

    2. PlutoniumKun

      Stage 3 sounds about right.

      I don’t know why, but I keep thinking of it as being about 20 minutes into the Brazil vs Germany World Cup semi final, Brazil being a goal down, and only the Germans on the field realising that the home defence is disintegrating and they are about to disembowel them in front of the entire world. David Luiz as Theresa May? Its a stretch I know….

      As for the City of London, I wonder if many of the senior people are like those successful CEO’s who are fine on making big deals, but have no idea just how the technical stuff their company depends on actually works. I suspect nobody actually looked really closely at just what a Brexit involved. I suspect some are only just doing that hard work now.

  9. RBHoughton

    In the film “Passport to Pimlico” a part of London found historical grounds to secede from Britain and declare independence.

    The City likewise has a semblance of independence – its own police force, control of its own boundaries enforced by the Lord Mayor, its own parliament of elected Aldermen and Common Council and a protective representative in the House of Commons, sitting behind the Speaker and watching the legislators.

    If it can be done, the City might assert its independence of the Crown and seek to maintain its Euro clearing as an independent offshore tax haven.

  10. cat's paw

    “David Luiz as Theresa May?”

    –You sir, have delivered a mortal and unjust insult to David Luiz.

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