Border chaos gives equity capital markets a glimpse of Brexit nightmare
The closing of borders between mainland Europe and the UK has provided a brief glimpse into the chaos that the immediate imposition of trading restrictions between the UK and EU might caused in the event of a no-deal Brexit on December 31. Both sides need to work around the clock to finalise a deal with a generous implementation period to avoid the kind of nightmare scenario that could lead to investors fleeing the UK.
Throughout the last few weeks equity investors have said that a chaotic end to the Brexit transition period could lead to a period of difficulty for UK companies attempting to raise capital, with investors pulling back from the country and companies exposed to cross-border trade with the EU.
On Monday, borders were closed between the UK and the continent in reaction to a new mutant strain of coronavirus, which appears to be spreading across the country.
By Tuesday, the UK media had reported a backlog of 1,500 lorries waiting to cross the channel and disrupted supply chains.
After just hours of border disruption there were reports of panicked phone calls between Johnson and French president Emmanuel Macron in a desperate attempt to get the border reopened.
There are hopes a deal to reopen links between the UK and France will be in place by Tuesday evening, but the episode should serve as a warning to both the UK and EU of the importance of keeping cross-channel trade flowing.
Should there be similar scenes of miles of lorries queuing to enter or exit the UK, empty shelves on both sides of the channel and severe supply chain disruption, equity investors will almost certainly pull back from the UK, and perhaps some European companies as well — European indices fell heavily along with UK stocks on Monday amid the border disruption.
The fragile economies of the EU 27 and the UK, both battered by a year of pandemic, can ill-afford any hindrance to their economic recoveries next year. There needs to be a Brexit deal and as comfortable a transition to the new trading reality as possible.
Equity investors will likely punish a January repeat of the scenes this week, making equity capital raining and any equity capital markets deals far harder to do.