U.K. plays Brexit hardball with EU from submarine base, pound tumbles
FASLANE, Scotland – Sterling tumbled to a 28-month low on Monday as Prime Minister Boris Johnson said the Brexit divorce was dead and warned that unless the European Union renegotiated, Britain would leave on Oct. 31 without a deal.
Many investors say a no-deal Brexit would send shock waves through the world economy, tip Britain’s economy into a recession, roil financial markets and weaken London’s position as the pre-eminent international financial center.
The pound, which was trading at $1.50 on the day of the 2016 referendum, dropped more than a cent to $1.2242 on nodeal fears, the lowest level since March 16 2017. Sterling has fallen more than two cents since Johnson was named leader.
Johnson’s bet is that the threat of a disruptive no-deal Brexit will persuade the EU’s biggest powers - Germany and France - to agree to revise the Withdrawal Agreement that Theresa May agreed but failed three times to push through the British parliament.
“The Withdrawal Agreement is dead, it’s got to go. But there is scope to do a new deal,” Johnson told reporters in Faslane, Britain’s nuclear submarine base on the Clyde in Scotland.
“We are going to go ahead and come out of the EU on October 31.”
When asked about his remark during the campaign for the party leadership that the odds on a no-deal Brexit were a million to one, he said: “Provided there is sufficient goodwill and common sense on the part of our partners, that is exactly where I would put the odds.”
Johnson also said that the Irish border backstop - designed to prevent the return of a hard border between Ireland and the United Kingdom’s province of Northern Ireland - was “no good, it’s dead, it’s got to go.”
Under the backstop, the United Kingdom would remain in a customs union with the EU “unless and until” alternative arrangements are found to avoid a hard border.
The 27 other EU members, though, say publicly and privately that the divorce settlement - including the backstop
- is not up for barter. Many EU diplomats say they believe an election in Britain is highly likely. If Johnson goes for a no-deal Brexit, some British lawmakers will attempt to stop him, possibly collapsing his government. If they try to thwart Brexit, an election becomes much more likely.
TURBO-CHARGE
Foreign Secretary Dominic Raab said London was “turbocharging” no deal preparations and cast the bloc as “stubborn” but denied he was threatening a bloc whose $15.9 trillion economy is nearly six times that of the United Kingdom’s.
Hedge funds increased their net short sterling positions bets that the pound will fall - to the highest level in nearly a year. The yield on Britain’s benchmark 10-year gilt GB10YT=RR fell to the lowest in almost three years as investors sought a safe haven.
Britain’s FTSE 100 rose to its highest in nearly a year on Monday, partly on merger optimism though exporters stocks benefited from a weaker pound.
In a sign investors are scrambling for protection against currency swings around the time of the Oct. 31 exit, three-month implied volatility surged to a four-month high.