Divorce deal will come at huge economic costs
LONDON’S FINANCIAL SERVICES INDUSTRY COULD FACE MASSIVE HURDLES
More than two years after the United Kingdom voted in a referendum to leave the European Union, Prime Minister Theresa May earlier this week got her cabinet to agree on a deal that will see Britain exiting from the EU.
Analysts and financial experts say the deal comes with huge costs for the economy and London’s financial services industry.
While May has convinced her cabinet that the deal was the best the world’s fifthlargest economy could hope for and that the other options were leaving with no deal or thwarting Brexit, critics within her party and the opposition are not convinced. This leaves the chances of the deal getting passed in the parliament in doubt, adding further ambiguity to the economic outcome of the Brexit deal.
“When parliament rejects the prime minister’s proposal, as surely it will, there will still be time for ministers to negotiate something better,” Nick Timothy, one of May’s former chiefs of staff wrote in the Daily Telegraph newspaper.
London’s financial services sector also is not convinced about the deal given the political certainty. “The parliamentary arithmetic has looked tight for some time. It now looks tighter, given signs of greater unity among those who object to the draft agreement,” Goldman Sachs said in a note to clients.
Risk perception rises
Although the cabinet nod to May’s Brexit deal is touted as one step forward, many analysts see it has just added to risk perception on the pound, the economy and the financial markets.
“Euro-sceptic Tories are against the UK being restricted and want to strike trade agreements with the rest of the world, but under the current draft agreement there will be a transition phase that will prevent them from doing so. That’s why markets feel getting the drafted agreement approved through parliament is a hard task. There’s also a more significant risk if the conservatives demand a vote of no confidence in May,” said Hussein Sayed, Chief Market Strategist at FXTM. Such a scenario will likely lead to a general election, putting the UK in a much worse position. While the uncertainty is likely to take its toll on the financial markets, economists expect the macro economic impact will be sharp.
‘Total disaster’
Analysts say the handling of the whole Brexit process by the UK government has frankly been a total disaster.
Yesterday saw several more ministers resign, this time over the Draft Withdrawal Agreement from the EU which was secured last night. With the pressure growing on Theresa May’s position as UK prime minister, sterling is taking an absolute hammering. The GBP/USD, down about 200 pips or 1.5 per cent, has further moved away from the 1.30 handle, trading around 1.2790. Brexit Secretary Dominic Raab became the latest significant minister to quit because he “cannot in good conscience support” the UK’s draft Brexit agreement with the EU.
“Although May claims she has secured the backing of her cabinet for the agreement after a lengthy meeting Wednesday night, clearly not everyone was on-board. Indeed, several ministers have reportedly spoken against the withdrawal agreement and with Raab quitting, the Conservative backbenchers may decide to force a no-confidence vote in her,” said Fawad Razaqzada, market analyst, Forex.com.