Even if Brexit Vote Wins, there may be No Brexit: Daiwa

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?

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  23 comments for “Even if Brexit Vote Wins, there may be No Brexit: Daiwa

  1. VarAway says:

    Wolf, my compliments.
    GREAT article!
    Minor correction, the Irish were voting THREE times.
    The 3rd one was the “correct” one…..
    Talking about democracy…
    The Dutch PM Mark Rutte said during a speech on BBC,
    that he was totally, totally TOTALLY against ANY referendum.

    Forgetting to mention the Dutch voted against closer ties
    between the EU & the Ukraine, during the last referendum.

    I would vote for a BREXIT.

    • Wolf Richter says:

      The Dutch referendum on the Ukraine (we posted an article on it from a Dutch journalist) was, imho, not quite in the same league, in terms of importance, as the referendums on the constitution, the Treaty of Lisbon, or Brexit. So I didn’t include it. But it certainly is the same principle. Maybe I should have included it.


      BTW, here’s the article on the Dutch referendum, written 3 days before the referendum. It predicted among other things: “Though the formal outcome is not binding, it seems unlikely that the ruling coalition will be able to even partially ignore its result.”

      I’m not sure that prediction turned out to be entirely correct.


  2. nick kelly says:

    OK, let’s explore this. The Irish voted to join the EU in the second referendum. Presumably the article is saying this was a perversion of democracy and this shouldn’t have happened.
    So let’s suppose it didn’t happen. Now what? The big three Irish banks (and the others don’t amount to anything) are broke and the Irish government has not only guaranteed deposits it has guaranteed the banks’ bonds.
    This broke Ireland.
    So a bailout, i.e. an low interest long- term huge loan HAS to come from somewhere. The only other outfit that does this kind of ICU work is the IMF, and we know how popular that would be.
    So assuming no EU aid, and no IMF, the country becomes part of the third world, which is kind of what it was for most of the 20 th century.

    Greece was an even starker situation because, after the grand stand play
    organized by the Minister of Finance ( an expert on games theory)- holding a referendum while negotiating- the EU said OK come back when you have the result. But pending that, no more money.

    That’s the week the cash machines ran out. The Red Cross began scrambling to line up essential drugs like insulin on credit, because the country DIDN’T HAVE ANY MONEY.
    Sorry for caps- don’t know how to use italics, but the point has to be made that this was a fact, and in the words of Bertrand Russell, a fact is something that is what it is however we chose to think about it.

    Any bank will have had the experience of dealing with formerly well- off
    clients or spoiled rich kids who have finally burned through their inheritance. Slightly petulant (see Greek MF) about even having to report
    to the bank manager, they ask what is the problem.
    That’s when the manager says: You are broke.

    To be broke, individually or collectively means you are no longer in control of your choices. The Greek referendum made as much sense as telling the bank manager that ‘we had a family meeting and we don’t like your terms.’

    It would have been better to hold a referendum on EU membership and when it came through as a ‘Yes’ for Grexit- just leave. Then they can print all the drachmas they like.
    Number one opponent: the huge public sector- it doesn’t want to be paid in drachmas.

    • nick kelly says:

      PS: I support the IMF position that some debt forgiveness is required, subject to Greek budget cuts, but the ECB apparently doesn’t.

      Re: what is a bailout and what isn’t. Almost none of the so-called bailouts were literal forgiveness. That kind of forget- about- it is usually reserved for African basket cases. So if you want to be technical don’t describe the GM or Chrysler rescues as bailouts. The government lent them money to restructure, they did, with union concessions, and I believe the money has been paid back.
      But everyone does call it a bailout.

      A typical sovereign bailout or what ever you want to call it, replaces short term loans with longer ones. often at a low interest rate. Depending on the terms, this can amount to a transfer of money to the borrower. But it allows the lender to keep an ‘asset’ on his books. Extend and pretend- but there is no pretending about debt forgiveness.

      The latest idea from the IMF is to extend Greek debt maturity to up to 80 years, with a ten year moratorium on interest.

  3. Ptb says:

    Is this “crying wolf”?

  4. ERG says:

    Fits the saying: “If voting really made a difference, we would not be allowed to do it.”

  5. Max says:

    The next 24 hours could get crazy.

    Glad Wolf will be covering it in all it’s gory details! ;)

  6. Ray Antley says:

    It’s a Hotel California vote. You can vote any way you like, but you can’t ever leave.

  7. d'Cynic says:

    Reportedly, the Brussels eurocrats were told by Cameron to “shut up”: not to issue threats or give advice on how the Brits should vote. I wonder why? /sarc
    The previous referenda are not in the same league as the brexit. Firstly, the gravity of the question is better understood. Secondly, the political climate has deteriorated across other parts of the EU, and more may be coming.

  8. Richard says:

    This is EXACTLY the same situation as with the original 13 colonies which joined the union with the express condition that they could withdraw at any time.

    The Civil War showed them how true that was (notwithstanding the ‘slavery’ issue which was, of course, a red herring.

  9. Chhelo says:

    So am I lead to understand it’s either fall off the cliff now or fall off the cliff later.

    Either ways Europes future does not look bright but then again we in the US are likely in the same boat when the best we can do is Trump or Clinton.

    Talk bout tragedy. Self immolation on a grand scale.

  10. Kreditanstalt says:

    “…UK stocks, bonds, home prices…” would suffer?

    But aren’t they precisely the most bubblicious? “Financial assets”?

    Hopefully, in a situation in which EVERY elite – unions, the CBI, The City, every (so far ‘major’) political party, party leaderships, numerous celebrities, most mainstream media, “leftists” and “rightists”, business tycoons, and nearly all elected politicians – so desperately, grubbily desire a “Remain” victory, the general public will sensibly run THE OTHER WAY…

  11. ML says:

    Here in UK we vote today. The polls predict and I agree the result will be a close run thing.

    The campaign has not been helpful – we the public have not been provided with the facts and information in a calm and unbiased and neutral way. Instead we have been preached at, told in no uncertain terms, despite the fact that there can be no certainties either way. We have been left to make up our own minds which would be no bad thing were we in posession of the facts.

    For some time the left and right political ideologies and policies have been converging. This referendum has shown just how divergent they really are. Unless the outcome is overwhelmingly one or the other, I think we are on course for a political revolution.

    The Bank of England’s assessment of what could happen if we leave bears a striking coincidence to what is happening already.

    The EU is in trouble, that much is obvious. In a few years time it may implode. The UK economy is heading towards becoming one of the stronger ones if not the strongest.

    Just because we don’t get out of the EU as much money as we put in is of no consequence to a youth that isn’t much interested where the money comes from as long as it does is no reason for older and possibily wiser people to vote leave and risk leaving the youth and their future in the lurch.

    The EU cannot afford for us to leave because unlike some other member states we do not misbehave ourselves. Non EU countries cannot afford for us to leave because the UK is their stepping stone into the EU. Hardly anyone wants us to leave because not enough of them are aged 43 or older and have no experience of what it was like in the UK before we joined the Common Market as it then was.

    The stark bare facts are a choice between leave and remain.

    I now refer to the remain as the remains. That makes more sense.

  12. Drew says:

    A couple of thoughts on the article and Brexit. One, the suggestion that the referendum will be ignored if there is a Leave win is not likely to hold water. The British are very fussy about their democracy, and in the referendum the people will have spoken. Furthermore, the 2013 reason for calling the referendum was to do away with the UKIP ‘threat’ to the Conservative Party. Armed with a Leave vote unfulfilled UKIP would reap enormous benefits and likely tear the Conservative Party completely in two. So, they’ll leave if the vote goes that way.

    Secondly, whilst in the mid-term there are likely to be some painful moments (not near term as they will be busy negotiating, per Article 50, for the next two years and not much will happen until 2018 I should think) as things re-adjust, Britain will remain a country with 60 million people, most of whom are relatively well off. Germany, the US (who traded with Britain even during the War for Independence and ever since too – what nonsense to utter Mr Obama) and many others will all want to sell to Britain who will in turn negotiate trade agreements quickly. In the long term these new arrangements will shake up the establishment and shake up the modus operandi of Great Britain – and as with any shake up this will invite innovation, creativity and freshness. Long term therefore, Britain’s outlook should be stellar. A little before the EU, and only 100 years ago, Britain ruled the largest empire ever created. The land of Shakespeare, the Industrial Revolution and Queen Victoria will surely muddle through, and prosper.

  13. Michael Thian says:

    The media is creating all this excitement and uncertainty about Brexit merely to grab more audience share. Britain’s leading bookmakers’ latest odds is 3-1 for Leave and 1-4 for Remain. Where is the uncertainty? I trust their judgement more than the political commentators’.

  14. unit472 says:

    Famously, British writer and Labour MP wrote The Great Illusion in 1910 in which he argued trade links and economic integration had become so deep in Europe that any new war was impossible.

  15. Lea says:

    The entire system of banking, securities, interest and winners losers is faulty , been failing for centuries. Few get rich rest struggle a life time and die. The rich hold to their gold and story repeats itself eternally,
    Nature thrives always based on law of abundance without fear it renews itself eternally, rises from ashes always.
    If one day humans live within nature learning to thrive and enjoy life simply we all be wealthy , healthy and joyful.
    If you insist keeping the same system you are insane and will eventually disappear from this planet.
    No ideology is more faulty than a global economy or a EU commission to run a continent of various cultures.
    You have not learned to live with your own kin and you are fighting with everyone now, have nukes on your territories in hands of psychopath. Are scared to stand alone as a nation and rebuild your culture yet in the past you called yourself an empire.
    Money fiat money is worthless, you are willing to live a scam with no power over your life for security?
    If you do not fight now or remove the EU as it is you lost as a nation.

    • nick kelly says:

      Why are you using a computer if you wish to live the simple life?
      A computer that would have cost a million dollars 30 years ago- dirt cheap today- thanks to progress and capitalism.

  16. bead says:

    Like the TARP vote in the House. Wall Street gave them a second chance to ensure the betters got their bonuses. To perdition with principle.

  17. wholy1 says:

    It’s all S&M (smoke and mirrors) and [one of] the four-letter word[s] of consequence: DEBT!

  18. nick stuart says:

    Wow! Ready for a bobsled ride straight into a sinkhole of political and financial chaos? And while it might seem a bit of bright hope–that the Brits would bravely rise to the polls to stave off cultural suicide as well as the Zionazi bankers, remember that these same folks (the neocon dual citizen lunatics) are perfectly prepared to bring down the whole show ( the “Samson option”)…game on!

  19. Joe says:

    I voted for Brexit not because of immigrants or any nationalist reason. I am an immigrant but I see the whole EU has become a Titanic heading to an iceberg with the € sign. It’s time to take a raft before it’s too late via other EU lovers are singing & dancing in the main hall.

    Looks like other countries are having a second thought abandoning the ship.

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