Buckle up: Boris is at the wheel of the Brexit bus on the road to no one knows where
London’s capital markets are again under threat of severe disruption as the UK’s clown prince in chief, Boris Johnson, became prime minister this week.
Johnson was long expected to become leader of the ruling Conservative Party, and therefore prime minister, but his ascension to the office adds further levels of despair to what was already a bleak picture for UK capital markets.
The extension to the date by which the UK must leave the EU, granted in March, gave capital markets breathing room and allowed those in them to put the chaos surrounding the UK’s departure from the bloc to one side and to do business.
Many believed that a no-deal Brexit, where the UK crashed out of the European Union without an agreement, was increasingly unlikely and the country would either reach a negotiated settlement with the EU or perhaps not leave at all.
A Johnson premiership means that a no-deal exit is not only back on the table, it could well become policy.
Parliament has done nothing to make that transition less damaging for the financial services industry and will have little time to do so. Whatever form Brexit takes, it is bound to be chaotic now, especially given how thin Johnson's control of Parliament is. His party has a working majority of two, likely to fall to one next week.
UK equity issuers looking to raise capital must contend with the fact that the panic and posturing will start in early September, the exact time everyone wants to start doing deals again after the summer break.
Some markets may fare better than others but, given this year has already shown how easily capital markets are disrupted by political machinations and international negotiations few will welcome a return to Brexit mayhem and no-deal bluffing.
Will investors buy UK bank bonds without some understanding of how their issuers will fare come the autumn? How can a buyer realistically value UK corporate debt without knowing whether companies will be able continue to conduct business within the EU?
If the UK does crash out with no deal, it will also cast a shadow over any regulatory equivalence negotiations in a future relationship with the EU — the arrangement envisaged by Theresa May's government for post-Brexit financial services.
The equivalence system requires goodwill between both parties but it is unlikely the EU will be willing to do UK financial services companies a favour after its prime minister has torpedoed an orderly Brexit and reneged on British financial commitments.
The EU’s decision not to extend equivalence to Swiss exchanges and Switzerland’s subsequent retaliation shows that the bloc is willing to use granting equivalence as a political tool. It was already a perfect example of why the measure is an insufficient framework for future EU-UK financial services relations after Brexit.
All of these questions, so important for capital markets, are up in the air despite the proximity of the deadline.
Trying to predict a grand strategy behind the catalogue of contradictions Boris Johnson has already uttered on Brexit is futile simply because there may be no strategy at all.
The uncertainty which has led to fund managers consistently ranking the UK as their least popular market and which made business so difficult for some issuers in the first three months of the year is set to return in September with a vengeance.
Weary bankers and investors almost certainly want nothing more than to forget about Brexit over the summer; but they have to be ready for any eventuality and agile enough to adapt to whatever the consequences are, no matter how unthinkable.