Investment bank’s cynical analysis explains how things work.
Daiwa Capital Markets, the investment banking arm of Daiwa Securities Group in Japan, issued a laundry list today of the biblical catastrophes that a Brexit will cause to the pound sterling, global equity markets, global futures markets, credit spreads…. It would “cause serious economic/market damage,” and “hardest hit, of course, would be UK financial assets.” And it would trigger a recession.
So the Leave vote would cause a lot of bloodletting among Daiwa’s constituents and globally. The Leave vote would be to blame. We get that. But it gets more complicated:
And while it may be expected that, after the initial knee-jerk response, some of the risk-off sentiment would quickly dissipate in most other markets, the likely economic and political fallout in the UK would affect asset prices there for a considerable period.
So the rout of UK stocks, bonds, home prices, etc. would continue. There would be QE and rate cuts in the UK in response to this rout and to a “sharp slowdown in its aftermath.”
A vote for Brexit “would usher in political uncertainty” of biblical proportions: Prime Minister David Cameron might have to go, given how he’d botched this situation, and his successor – Daiwa points at Boris Johnson – “would likely end up regretting taking the job.”
The note went after the Leave folks with a vengeance:
The Leave campaign, whose whole proposition centered on a set of, at best, dubious claims, have set out no plan whatsoever for how they would separate the UK from the EU.
Some members of the campaign (and hence the Cabinet post-Brexit) have claimed that they would be in no hurry to enact the Article 50 process that would trigger formal negotiations with the other 27 countries to extricate the UK from the EU. Instead, they have threatened to unilaterally withdraw from parts of the EU Treaties, something that would be a flagrant breach of international law and would risk retaliatory action from the rest of the EU.
At the same time, Johnson would face a House of Commons where there would still be an overwhelming majority of pro-EU MPs (and a pro-EU upper chamber), meaning that passing the enormous amount of legislation required to extricate the UK from the EU would likely prove impossible. This would be particularly true if a vote to Leave was only marginal.
OK, as American, I have no opinion on how Brits should vote. But Daiwa says, it might not matter how they vote: There may be no Brexit even if the Brexit vote wins.
If the people vote for Brexit, the subsequent politics are going to be very messy to a backdrop of chaotic financial markets, crashing asset prices, a swooning currency, a recession, and a second independence referendum in Scotland that would allow it to remain in the EU.
All of it would be decorated by “a clear message” from the EU “that the UK will not be able to negotiate a special deal with the EU on trade.” Daiwa’s note added:
In particular, full membership of the Single Market would require the UK to:
- Continue to pay its dues to the EU (meaning the £350mn per week the Leave campaign have falsely claimed the UK gives to the EU would not be available for the myriad things the Leave campaign have said it would spend it on instead)
- And accept free movement of people (breaking the Leave campaign’s most effective campaigning tactic that leaving the EU would allow the UK to “control its borders”).
Faced with reality, rather than rhetoric, and a realization that the promises of the Leave campaign cannot be fulfilled without causing enormous economic damage, buyers’ remorse may well set in, and pressure would likely grow for a second referendum.
So next time, the people would have a chance to correct their error and get the answer right.
If Daiwa’s cynical take on post-Brexit political developments in the UK turn out to be close to reality, it won’t be the first time that a referendum in the EU, after people voted the “wrong way,” would essentially be squashed.
In 2005, the French and Dutch voted against the European Constitution. It was scuttled alright. But it was replaced by the Treaty of Lisbon, which amended the treaties that form the constitutional basis of the EU.
In June 2008, Ireland, as obligated by its constitution, held a referendum to ratify the Treaty of Lisbon, and the people voted against it! That was the wrong answer. After the euro debt crisis began to engulf Ireland, the referendum was held again to give the people a chance to correct their error and get the answer right. And they did.
In 2015, Greeks voted in a referendum to reject the Troika bailout conditions by a landslide majority of 61%. But no problem. There was some housecleaning in the government, and soon the government accepted the very bailout conditions the people had rejected.
So Daiwa’s prediction that a Brexit vote may not lead to a Brexit is well-founded in the EU’s gloriously democratic history: referendum results when people voted the “wrong way” have been disposed of one way or the other every time.
And the EU is taking its anti-democratic approach to a whole new level. Read… Is the EU Preparing for Another Stealth Coup?