The crashing pound as the “de facto opposition” to the government.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Out of all the mist surrounding the UK’s future trading relationship with its biggest trading partner, the European Union, one thing is gradually becoming clear: as things currently stand — and they could shift — if Brexit is to genuinely mean Brexit, as British premier Theresa May insists, it can only mean one thing: a hard, clean Brexit.
In other words, the UK will leave the EU without any new trade agreements with the EU in place.
The alternative — a so-called “soft” Brexit — would imply having to accept full freedom of movement for all EU citizens in return for some form of privileged access to the single market. Given that regaining control of UK borders was one of the key issues that swung the referendum in Brexit’s favor, such a proposition is unlikely to sway British voters.
Nor, for that matter, would all the extra add-ons, including having to remain subject to the vast bulk of EU regulation as well as continue paying into its budget.
Under a soft Brexit, the UK would essentially continue to face almost all the restrictions, impositions, costs, burdens and other disadvantages of being in the EU while wielding even less influence — as in no influence at all — over how arrangements might change in the future. As such, the only option that offers the UK any hope of self-rule in the foreseeable future, which was ultimately what the referendum vote was all about, is that of a hard or clean Brexit.
And that could be very bad news for the City of London.
Thanks in no small measure to its privileged position as global intermediary between the European and global currency markets, “The City” has enjoyed unbridled growth and success in recent years. It is home to almost one-half of the entire global interest-rate OTC derivatives market, compared to 35% in 2001. Its share of global forex turnover increased from 33% to 41% between 2001 and 2014. And its share of global hedge fund assets doubled, from 9% to 18%.
Its dominance of the EU’s financial industry is even more pronounced, as the FT reports.
Half of the UK’s trade surplus in financial services — worth some £18.5bn in 2014 — comes from exports to the EU… It does 78 per cent of the EU’s foreign exchange business and 74 per cent of over-the-counter interest rate derivatives; 59 per cent of international insurance premiums are written in London; and 85 per cent of the EU’s hedge fund assets and 64 per cent of private equity assets are managed in the city.
Thanks to Brexit, much of that is now under threat, prompting serious cause for concern not only for the UK economy, which has grown hugely dependent on the financial sector, but also for the global banks that have made the City of London their favorite home from home. As WOLF STREET reported before the referendum, those banks would much prefer to continue operating under The City’s soft-touch regulation than have to disperse their operations across European cities such as Frankfurt or Paris, where they can probably expect a lot more government interference.
When it comes to financial secrecy, no European jurisdiction – not even Switzerland, Ireland or Luxembourg – can hold a candle to the wholly autonomous City of London, one square mile inside the nation’s capital that for centuries has existed as an ancient, semi-alien entity lodged inside the British nation state.
For the big banks and broker dealers, London is paradise on earth, from which they’ve been able to cook up just about every major global financial scandal of the last decade, including Libor, Forex, MF Global, the London Whale and rampant gold and oil-price rigging. Barring the occasional financial slap on the wrist from the U.S. Justice Department, the banks have walked away scot-free each and every time.
But now Brexit could end up placing the whole thing in jeopardy, especially if the EU refuses to allow the City’s banks, asset managers, and insurers to continue “passporting” their services from London right across the EU, as Jens Weidmann, President of the Bundesbank, recently cautioned would happen.
The response of the banks has been to dust off Project Fear. Take, for example, Daiwa Capital Markets’ recent forecast that the pound sterling’s flash crash last week was merely a portent of what lies in store for the British currency, whose performance it lumped together with the currencies of Angola, Sierra Leone, Nigeria, Venezuela, Mozambique and Suriname — “a rogues’ gallery of countries facing, variously, war, disease and economic collapse”:
The harder the Brexit, the more severe the economic damage will be. Certainly, for foreign investors, the UK now looks a much riskier place to put your money, putting further significant downward pressure on the currency.
British megabank HSBC went a step further, arguing that the British currency, once a “stable and relatively simple currency,” has become a “political and structural currency.” In other words, it’s fair game for global speculators. According to David Bloom, HSBC’s global head of FX, it is now the “de facto opposition” to the government’s policies.
Despite all the fear mongering, it’s not all necessarily doom and gloom for the square mile. As The FT points out, there’s an “underlying confidence” that London will adapt, as it has done for centuries, even if it does lose some business. It’s already the world’s biggest offshore yuan center after Hong Kong. According to Xavier Rolet, CEO of the London Stock Exchange Group, in 2016, it listed more Dim Sum bonds than the rest of the world, excluding Greater China itself. London is also the leading venue for Masala bonds.
Even if there is a hard Brexit, the fallout for The City may not be as severe as some are suggesting. According to a new report published by the financial consultancy Oliver Wyman, in a worst case scenario the City could lose 75,000 jobs — 13% of the total. The most vulnerable areas would be clearing, insurance and investment EU-related investment banking. That would hurt, but it would be survivable.
And there’s still a good chance that Brexit, whether hard or soft, will never happen. It faces fierce opposition from a broad coalition of some of the most powerful forces, including the EU’s ruthless bureaucracy, the ECB, the global corporatocracy and the City of London.
There’s also the possibility that by the time Brexit negotiations actually begin in March 2017, Europe’s institutions will be in such disarray that their priorities may well lie elsewhere, such as trying to keep their blooming banking crisis under some kind of control. By Don Quijones, Raging Bull-Shit.
So the zombification of EU banking system gathers momentum. Read… Reek of Desperation Surrounds EU Banks, Regulators Prepare for “Derivatives Clearing Crisis”