12 September 2018

Sleepwalking towards crash-Brexit – 144th Brussels for Breakfast – CPD Notes

The odds for a no-deal, chaotic Brexit soared in the summer due to fierce infighting within the Conservative party and the publishing of recommendations in case of no-deal, to the point that some argue that May's government will be completely unable to achieve any form of Brexit agreement.

 

Highlights from the “Brussels for Breakfast” meeting

The new term opened with a burst of speculation about the top jobs in the EU that are now up for grabs during the next year. Nominations for the new Chair of the SSM have now closed – with only two declared candidates. If Sharon Donnery – Deputy Governor of the Central Bank of Ireland - is appointed, how will that affect the chances of her Governor – Philip Lane – being appointed to the ECB Board to replace Peter Praet?

Chancellor Merkel seems to have decided that Germany should have a run for Commission President rather than ECB President. Does that open the door to one of the excellent French candidates for the ECB? But is her support for MEP Weber as the EPP’s Spitzenkandidat a ruse to allow the European Council to install its own choice, rather than accepting the European Parliament’s decision? However, the successful candidate must obtain the support of an absolute majority of MEPs --- more in the months ahead!

We honoured our promise not to discuss Brexit politics but we could not avoid the problem of continuity of contracts. So far, the Commission has argued that it is a matter of private contracts and not public policy – despite UK demands. However, the head of the German regulator – BaFin – has now come out in favour of public action – as has AFME. We were told that one of the problems in private re-papering was the risk that those “in the money” had an economic interest to just demand “the money” instead!

Banking union quickly came into focus as we discussed the progress reported by the EBA’s latest Risk Dashboard: CET1 ratios slipped a tad to 14.4% and overall NPLs down to 3.9% - a third down in 3 years but still standing at €779 billion. However, banking ROE slipped to 6.8% - still below the cost of capital for most banks. This led us into a discussion of the problems faced by smaller banks - the natural funders of SMEs – that are financed largely by retail deposits that may turn out to be more exposed to bail-in than depositors may realise.

CCP interdependency was featured in an IOSCO report that demonstrated that the industry continues to ever-more concentrate – not only amongst clearing members but also in services provided to the CCPs. These inter-dependencies underline the need for stress tests to promote CCP resilience, recover and resolvability.

Key items from the rest of the month:

After a summer of utter despair for UK PM Theresa May, who saw some of her own Ministers turn against the proposal agreed at Chequers and was forced to publish plans on what a no-deal Brexit would mean for every British industry to assuage Tory Brexiteers, autumn offers no brighter perspectives for talks on Britain’s disconnection from the EU. With the far right on the rise, migration to the EU an unresolved issue causing vociferous divisions among member states and mounting pressure to step up efforts to complete Banking Union and agree on the next EU budget before the Parliament elections in May next year, Brussels has ‘bigger fish to fry’ and isn’t likely to devote much time or grant important concessions to a country that seems to be shooting itself in the foot as it waves goodbye to the largest political and economic bloc in the world.

A detailed analysis of the so-called Chequers plan, or the White Paper on a new UK “partnership” with the EU, shines a light on the naivety of its key assumption: the premise that the UK and EU27 are negotiating on a level playing field rather than with a partner 6-8 times one’s size, writes Graham Bishop. The complete absence of any detail on how the detachment will be accomplished and how new arrangements – which keep being at odds with the EU’s main requirements - will be put into place for financial services, along with a unrealistic approach to the timelines for deliberations and implementation of these, “confirm that there is no realistic possibility of even half a life-belt for years to come,” Bishop concludes. 

The White Paper didn’t go down well among May’s team and prompted several high-level Cabinet resignations such as Boris Johnson - who demanded the proposal be ditched outright - and  David Davis - who warned that he’ll vote against the plan, - which raised the prospect that the Prime Minister could be defeated in Parliament later this year. The rift among Tories was exposed the day the new Brexit Secretary, Dominic Raab, presented the first batch of technical notices for British businesses to know how to proceed in case of a cliff-edged split with the EU  in an upbeat tone, only to be faced hours later with a letter by Chancellor Philip Hammond saying the crash would cost public finances £80bn. That sum would be added to the 2% of GDP that Brexit has already cost to the UK, according to UBS estimates. The £7.8bn dip in services exports to the EU in the first quarter of the year due to a big decline in trade with the EU a year ahead of Brexit must have contributed significantly to the Swiss bank’s calculation, according to the Office for National Statistics (ONS). The repercussions of the EU and the UK officially starting splitting WTO membership agreementsare yet to be seen.  

On the EU side, the top EU negotiator for Brexit talks, Michel Barnier, also rejected the plan agreed at Chequers, saying that he is ‘strongly opposed’ to its trade proposals. Barnier instead urged to find a "backstop" solution in the Withdrawal Agreement for the Northern Ireland border, one of the main issues of the 20% of the deal still pending agreement – however, the EU broker tried to appease increasing worries that negotiations could fail, saying a deal could be reached “within six or eight weeks.” The Frenchman shows no signs of softening his negotiating stance and British mainstream politicians of all parties should ready themselves to accept the Barnier package deal, Andrew Duff cautioned. But it is also in Brussels’ hand to avoid the abyss and make sure that they agree on a firm direction by the autumn, experts at Bruegel argued. [...]

Full article available for consultancy clients here