BNY Mellon: Brexit Update

Mar 6, 2019

With attention starting to focus on the series of votes promised in the UK Parliament by the end of next week, it’s an appropriate point to assess the latest shifts in the Brexit story.

The “Meaningful Vote”

• The UK’s House of Commons has been promised that by March 12 it will have been given a meaningful vote on the revised deal set to be brought back from Brussels from Prime Minister Theresa May. A meaningful vote in favor of the deal must take place before the European Parliament can decide on whether it consents to the withdrawal agreement.
• On January 15, the House of Commons rejected the deal as it then stood by 432 votes to 202. 118 out of 317 Conservative MPs voted against the deal. This provides a useful benchmark.
• At the start of last weekend that was some talk of the Conservative Party’s Eurosceptic ERG group softening its line slightly on the government’s deal. As there are around 90 members of the ERG it’s arguable that their support would still leave the government stretching to find sufficient votes to get the deal through.
• A report appeared on Monday saying that Attorney General Geoffrey Cox had given up trying to secure a hard time limit or unilateral exit mechanism from the backstop.

A subsequent report noted that "little progress has been made in agreeing revisions to the (withdrawal) deal, no text has been put forward by either side, and diplomats in Brussels see an almost unbridgeable expectation gap with Conservative MPs over what can be negotiated over the coming week".

• A report appeared this morning that last night’s talks between Stephen Barclay, the Brexit secretary, Geoffrey Cox, the attorney general, and Michel Barnier, the EU’s chief Brexit negotiator, “didn’t go very well”.
• The DUP’s Brexit spokesman said this morning that he thinks a “no deal” Brexit would be better than the PM’s deal.
• A report appeared yesterday that the government’s chief whip, Julian Smith, had told senior ministers that the vote next week will be tight.
• If these reports are accurate then it’s questionable whether the withdrawal deal will be passed in the meaningful vote. If so then the focus will likely shift to the two subsequent votes promised by the PM.

The Two Subsequent Votes

• If the House of Commons rejects the renegotiated deal, the PM has said she will then give MPs another vote on whether to press ahead with a no-deal Brexit.
• On January 29, the House of Commons voted 318 (including 17 Conservative MPs) to 310 (including 3 Labour MPs) in favor of a non-legally binding amendment that rejected “the United Kingdom leaving the European Union without a Withdrawal Agreement and a Framework for the Future Relationship".
• If Parliament rejects "no deal", MPs would then be asked whether they want a “short limited extension to Article 50”. If they do not then the UK would leave the EU on March 29 without a deal. If they do, then the government would subsequently seek the EU’s agreement for a delay and bring forward the necessary legislation. MPs could amend the motion to seek a much longer delay.

An Extension of Article 50?

• The vote last week in Parliament on an amendment that if MPs vote to delay Brexit then the government should seek an extension from the EU and bring forward legislation to change the date of the UK's departure provides a useful starting point for considering what support there might be for this.
• The vote saw 88 Conservative MPs, 10 Labour MPs and 9 DUP MPs abstain in the vote. Twenty Conservative MPs voted against the amendment. More Labour than Conservative MPs voted for an amendment that effectively endorsed the government’s plan.
• German Chancellor Angela Merkel has said she would be open to providing the UK with "a little more time". However, there have been a number of reports suggesting that a "short, limited extension" of Article 50 would not be permitted by Brussels.
• It is unclear whether there is any consensus in Parliament on the length of time MPs would be prepared to accept that Article 50 could be extended by. Even within the ERG views have been expressed in favor of a longer extension.

GBP

• The steepening of the GBP yield curve last week on the back of rising yields along with a broad decline in GBP/USD implied volatility suggest that the market reacted positively to the talk that pro-Brexit Conservative MPs were softening their line on the government’s deal.

However, it’s noticeable that gilt yields have been falling across much of the curve this week while GBP has been offered and implied prices have begun to creep higher again, particularly at the shorter end.

Given the timing this seems at least in part a reflection of the shift in focus away from the vote on the withdrawal deal and towards the question what an extension to Article 50 would look like and whether there would be sufficient support for such a piece of legislation.

This is consistent with the way GBP has behaved through much of the year so far.