Why is nobody talking about Brexit?
Thursday marks the UK’s deadline for reaching a Brexit trade deal with the EU, which according to the country's prime minister Boris Johnson means that it will begin to shift focus to preparations for leaving without one. A no-deal Brexit could be a disaster but nobody in capital markets seems to care.
For bankers, a no-deal Brexit should be a huge concern given that almost no progress has been made on equivalence for financial services. It is unclear how much of their continental banking operations can remain in London from January 1.
Their clients, and those clients’ shareholders, should also be worried that previously non-existent trade barriers will hit corporates already battered by the Covid-19 pandemic.
Perhaps the reason that bankers, corporates and investors seem so nonchalant about more than 40 years of trading cooperation ending without a replacement in December, is that they have bigger things on their minds.
The pandemic and the government lockdowns used to fight it has destroyed revenues in many sectors.
This historic crisis has meant that UK bankers have been working with corporate clients on simply surviving rather than planning ahead. The future trading conditions between the UK and the EU is taking a backseat when survival is the first priority of many UK firms.
However, no deal for January would mean tremendous disruption to the bottom line of many UK corporates when they can ill afford it.
Why should any investor commit to a rights issue for example, when uncertainty over the next few years of revenue because of the Covid-19 pandemic is also coupled with questions over whether companies can continue to trade seamlessly with Europe from January 1?
Investor support for deals is not being driven by companies being ready for whatever kind of Brexit may come their way. They are clearly not.
Last Thursday Alex Chisholm, permanent secretary at the Cabinet Office, told a parliamentary select committee that tens of thousands of UK businesses were not prepared for the end of the transition period.
He added that a government poll showed around a third of businesses believe the transition period will be extended.
This point is most likely the reason for Brexit nonchalance. People still don’t believe that a no-deal, or even a hard Brexit, is coming in January.
In fact, the government’s own research suggests a third of British business believes nothing is going to change at all.
These are dangerous assumptions. While it is likely that Johnson’s self-imposed deadline this Thursday is meaningless, there seems still to be some way between the two sides before any deal is reached.
What form any potential deal might take is also unknowable at this stage and a basic trade deal with no extended implementation period would almost be as bad for business as no deal at all.
The government’s strategy of talking tough and then making concessions has led to a boy crying wolf scenario, where UK corporates do not believe it will follow through on its Brexit threats. Once again they believe the government will concede ground in the name of sense.
If the UK finally does go over the Brexit cliff in December, then the hit to the economy and investor confidence will be even more severe because people simply can’t believe that such recklessness is possible in the midst of a global pandemic.