Fat tails

Dünya Executive - - REPORT - Steven Barrow, strategist, Standard Bank

There’s been a hollowing out of the center ground on Brexit. As a result, the tail risks of a no-deal exit, or no Brexit at all have become fat tails. Should the incoming PM fail to win new concession­s from the EU in double-quick time, he or she will face a number of choices.

The new leader could seek another extension to try to broker a new deal although, with all the main candidates campaignin­g to get Brexit done by the deadline of October 31, they won’t want to be seen failing just a few months into their premiershi­p. A second choice is to run down the clock and exit with no-deal. But, as we’ve seen in the past, Parliament is hell-bent on avoiding this. Its ability to frustrate a no-deal Brexit could be tougher this time around but there’s still the implied threat from a number of Conservati­ve MPs that they would rather vote with the opposition in a no-confidence motion against the government, and so force a general election, than accept a no-deal outcome. With just 9 percent support in the recent EU elections, the Conservati­ve leadership would have to think long and hard about a Brexit end-game that resulted in an election. And besides, even if there were an election, and it were to win, there’s still no guarantee that it could get its Brexit plan through, whether this plan is for a no-deal exit or not. The other option is for a second referendum. But while prior talk of a referendum has often been in terms of a three-way choice between a deal, no deal and remain, there seems to be a growing sense that it might have to be a binary choice between a no-deal exit and remain given that parliament does not support the deal, and the new Conservati­ve leadership might only be persuaded to go for this option if it is a binary choice. The fattening up of the tail risks on Brexit means that there’s an increased chance of a good outcome for the pound and UK assets (remain) and an increased chance of a bad outcome (a no-deal exit). (May 30).

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