The UK press has more than a few stories tonight on how things will come unglued in the event of a disorderly Brexit. S&P gave a warning that is frankly mild in light of the disruption of crash out as May’s efforts to open up the “Norway” option predictably failed and the Home Office looked utterly at sea regarding a disorderly Brexit. More on that shortly.
One positive development is the EU has apparently decided that being bloody-minded about forcing derivatives entered into by EU nationals needed to come to EU clearinghouses in the event of a crash out might cause enough problems in the short term so as to undermine the long-term commercial benefits. But the EU is is cooperating only to the degree absolutely necessary. From the Financial Times:
Brussels has responded to financial industry calls for continued access to London’s capital markets by providing reassurance that EU groups will temporarily be able to use crucial derivatives clearing services in the UK even after a no-deal Brexit…
Mr [Valdis] Dombrovskis, who is responsible for financial regulation, told the Financial Times that the relief, which would allow EU banks and companies to continue using UK-based clearing houses to process derivatives trades if Brexit negotiations fail, would be strictly short term…
“Should we need to act, we would only do so to the extent necessary to address financial stability risks arising from an exit without a deal, under strict conditionality and with limited duration,” he said.
S&P warns of crash out risk. The big news on the Brexit front, as far as Mr. Market was concerned, was S&P clearing its throat about a disorderly Brexit. From the Guardian:
The S&P report said:
- Unemployment would rise from current all-time low of 4% to 7.4% by 2020 – a rate last seen in the aftermath of the financial crisis;
- house prices would likely fall by 10% over two years;
- household incomes would be £2,700 lower a year after leaving without a deal;
- inflation would rise, peaking at 4.7% in mid-2019;
- London office prices could fall by 20% over two to three years, similar to the decline following the 2008 financial crash….
S&P said leaving the EU without a deal would make matters much worse, pushing the UK into a moderate recession lasting between a year and 15 months, with GDP contracting by 1.2% in 2019 and 1.5% in 2020. After that, the economy would return to growth, it said, though the pace of growth would be moderate.
The pound weakened to 1.27 dollars. The GDP contraction estimate sounds light, given the disruption to food supplies and the greatly reduced production from UK plants that are part of international manufacturing supply chains. Richard North agrees, elaborating on his website:
…this brings another day closer to a “no deal” Brexit, which the credit rating agency Standard & Poor’s is now predicting could tip the UK into recession.
Why this is even news is only to be imagined. I was pointing out on this blog 18 months ago that this could be the outcome, suggesting that a botched Brexit could rival the Great Depression in its effects on the UK economy….
In my opinion, it makes sense to take a pessimistic view and then to double down on that to expect far worse than the high-level pundits are predicting. And the reason for this is that the trading infrastructure of the UK is far more fragile than we are led to believe, and far less capable of withstanding the shocks of a “no deal” Brexit than is generally assumed.
Some clues to this come in a report which has received no media attention from Felixstowe-base hauliers James Kemball, brought to my attention by one of the blog’s readers.
Headed “UK Container Transport Crisis 2018”, this points to a UK container transport industry currently at crisis point, evidenced in recent weeks with major disruption to supply chains during this year’s peak season period.
Heightened by congestion at the UK’s major container ports, it tells us, the UK container transport sector has been overrun and struggled desperately to cope with the demand due to changes in the shipping industry over the past decade.
Hampered by driver shortages, poor infrastructure, legislation, escalating costs, decreasing revenues and the introduction of mega ships and mega ports, the future of the industry is in doubt without immediate change and reform.
The essential point here, from the Brexit perspective, is that many of the more optimistic pundits, confronted with warnings of disruption to the ro-ro traffic passing through the Dover-Calais route, argue that the slack can be picked up by other ports and, where there is a shortfall in ro-ro capacity, goods can be diverted into shipping containers and handled by the container ports.
Even in the best of times, this would lead to a significant loss of flexibility and extended transit times, rendering some goods uneconomic or impractical to ship.
But, even if swapping routes and transport modes is theoretically possible, the Kemball report suggests that an industry on the brink would not be able to cope with the additional traffic, on top of the disturbance and delays brought about by newly implemented border controls.
Norway rejected May’s late in game idea of joining the EEA/Efta as a way to preserve access to the Single Market. Richard North had said long ago that the UK needed to have started work on that long ago for this option to be viable. Readers like vlade and Clive were more skeptical. The UK would be vastly larger than the other Efta members and would expect to be the dominant player. And anyone who’d watched how the UK operated in the EU could not have failed to notice that the UK was regularly throwing its weight around and would regularly trash talk the Union.
Admittedly, May’s gambit was an even-more-certain version of this idea, the “Norway, then Canada” option, that the UK would join the Efta to provide a safe haven while it negotiated a free trade agreement with the EU. Why should anyone go to a huge amount of hassle to admit the UK as a temporary member, particularly when you have no idea when they might eventually dump you? From the Telegraph:
Oslo has poured cold water on a proposal from Tory MPs to adopt a Norway-style trading relationship with the EU to break the deadlock over Brexit and the Irish border.
At a press conference in Oslo, Norwegian prime minister Erna Solberg said allowing Britain to become a member of the EEA/Efta trading bloc, which has a very close relationship with the EU, would be “difficult” to accept.
EU workers go home? The UK scheme for “settled status” residents who’d lived in the UK for more than five years to be able to stay and enjoy the rights of UK citizens looks iffy in the event of a disorderly Brexit. The Home Office only set up a pilot program to register them and can’t give straight answers on how far it can get by March 29. From the BBC:
Firms may have to do “rigorous” checks on EU staff if there is a no-deal Brexit, a minister has suggested.
Caroline Nokes said employers wouldn’t be able to tell the difference between people who had settled in the UK and those who had just arrived…
Ms Nokes also revealed the system for EU citizens to register for settled status still didn’t work on Apple phones.
The US tech giant “won’t release the upgrade we need in order for it to function”, she told MPs…
The government wants the estimated 3.5 million EU citizens in the UK to apply for settled status so they can continue living and working her…
But it will not have happened by the time Britain leaves the EU on 29 March.
In fact, Ms Nokes revealed to the Commons Home Affairs committee, just 650 people had registered so far in a pilot programme…
But Ms Nokes suggested that in the event of a no-deal Brexit, where there would not be a transition period, new immigration controls – including employer checks of immigration status – will apply to EU citizens next year.
This sounds Kafkaesque. How can your prove your “immigration status” if the system isn’t in place for you to register? A suit was lodged yesterday and it can’t include the details from the Home Office briefing, indicating that there are even more problems with this program. From the Financial Times:
The UK’s post-Brexit residency plan for almost 4m EU nationals living in the country fails to offer hundreds of thousands of people the certainty that they will be allowed to remain in Britain, a charity is claiming in a legal challenge.
The Joint Council for the Welfare of Immigrants is concerned that the government’s scheme under which 3.8m EU nationals can apply for so-called “settled status” in the UK after Brexit does not have the simple rules that ministers promised it would.
Ministers have said repeatedly that under the scheme there would be only three checks on EU citizens before deciding whether to grant them settled status: nationality, residence in the UK, and whether they had been convicted of serious criminal offences…
The JCWI argued in its legal challenge lodged with the High Court in London that the settled status scheme rules were not simple because of the provisions in relation to removal orders.
UK has cinched only 14 of 236 international treaties. The pink paper earlier had said the UK would fall out of at least 759 agreements as a result of Brexit. Why is the number now so much smaller? Is it, so as not to scare the horses, that the focus is only on “treaties” and not “agreements,” which could be broader? Notice that Whitehall is the source of the figure, which is consistent with the notion that the officialdom wants to make a bad fact set look less catastrophic. From the Financial Times:
The UK has managed to “roll over”only 14 of the 236 international treaties that the EU has signed with countries around the world, raising fresh concern of disruption if Britain crashes out the bloc without a deal…..
Last week, Whitehall officials were given data showing that only a fraction of the 236 treaties that the EU has with countries outside the bloc have been successfully copied by the UK into new mini-arrangements with the relevant nations.
Britain needs to roll over about 40 free trade agreements that the EU has with countries including Canada, Japan, South Korea and Mexico.
The 236 treaties also cover important agreements well beyond trade — relating to airlines’ take-off and landing rights at overseas airports, as well as industries such as financial services, fisheries and nuclear.
UK-EU flight talks not started. Another cliff-hanger! In case you missed it, from the Guardian
Flights could be disrupted after Brexit, the transport secretary has admitted, but he said the European commission would be to blame for not starting talks on a deal to keep planes in the air.
Chris Grayling told an aviation conference that disruption was “unlikely” but that talks to secure an aviation agreement had not yet started with only five months to the date of Britain’s departure. He added: “That process is not in our hands.”
Grayling said there was “no way that flights will stop” between the UK and the EU, but there appeared to be a marked change in tone from previous speeches in which he had described planes being grounded after Brexit as inconceivable…
The legal basis for continuing flights between the UK and the EU is unclear without a new deal. Grayling said the UK could fall back on bilateral agreements with individual EU member states but was hoping for a “barebones” aviation agreement with the whole bloc, saying he had not met “one single person” in the commission or a member state who believed there would be an interruption to aviation…
But airport bosses said they were preparing for the worst, including queues of lorries potentially jamming Britain’s main road artery, the M1, because of new customs requirements.
Karen Smart, the managing director of East Midlands airport, which handles large amounts of freight, said Brexit could cause tailbacks on the motorway if longer checks on goods lorries were needed.:
I’m not sure what Grayling means by “interruption”. The EU has been insistent that only point to point flights will be allowed in and out of the UK to EU airports.
EU regulators give “don’t expect us to help” message to banks. Normally one would take this sort of “go prepare and don’t assume a bailout” message to be posturing, but financial services industry experts see the recently-adopted Bank Recovery and Resolution Directive as a monstrosity that will if anything increase the number of bank runs. And because it was a “no more bailouts” regulation, at a minimum it will make it politically difficult to bypass the BRRD and rescue banks.1 From the Financial Times:
Europe’s top official in charge of winding down failed banks has also recently urged the industry to press ahead with preparations for a no-deal Brexit, saying lenders should not expect regulators to help them cope with any upheaval caused by the UK’s departure.
Elke König, head of the eurozone’s Single Resolution Board, told the FT that banks should not expect any leeway in meeting one regulatory standard: the rules requiring lenders to issue a minimum amount of unsecured debt and other securities that regulators can write down or convert into shares if the institution fails.
If Britain leaves the EU without an exit deal, bank bonds issued under UK law will no longer be eligible without contractual changes. This could affect more than €100bn of bank debt, according to industry estimates.
The Fed has an “unusual and exigent circumstances” clause, which as former central banker Willem Buiter put it, allows the Fed to accept a dead dog as collateral. I’d assume the ECB could also be forgiving in a crisis but due to the hour and the terrible state of search engines, I’m prevailing on readers to fill in details.
Unfortunately, none of this is cheery news to those of you who live in the UK or Ireland. There’s no change in the inertia propelling the UK into a crash out. Hopefully later in the week, we’ll discuss some procedual issues.
1 Saving banks as institutions does not require sparing their executives and board members.