JPMorgan: Likelihood of cliff-edge Brexit drops from 25% to 15%

Reuters

• The likelihood of a no deal Brexit has dropped from 25% to 15%, a note by J. P. Morgan said on Monday.
• This is due to reduced challenges to the Prime Minister’s leadership and attitude changes from Eurosceptic MPs, the note said.
• But the UK is likely to have to make four key concessions in the course of negotiations, it said.

LONDON — The likelihood of a no-deal Brexit has fallen from 25% to 15%, driven by attitude changes among Eurosceptic MPs and reduced challenges to the Prime Minister’s leadership, according to JPMorgan.

The probability of the UK crashing out of the EU in 2019 with no deal has reduced in recent weeks, thanks to a “stabilisation in support” for Prime Minister Theresa May’s leadership among Conservative party members and the “relatively muted response” among Eurosceptic MPs to the likely terms of a transition period, a research note said on Monday.

Despite last week’s chaotic cabinet reshuffle, JPMorgan said May appeared to have “consolidated near-term support for her leadership,” as MPs recognise that a leadership change would be “unpredictable and time consuming” while Brexit talks are at a critical stage, and a challenge could “jeopardize the Brexit process as a whole.”

Eurosceptic MPs have encouraged each other to keep “their eyes on the prize” of leaving the EU, the note said, even if the initial exit terms are unfavourable.

Since the European Council agreed in December that “sufficient progress” had been made on withdrawal related issues, the timeline for negotiations has solidified, the note said. Current hopes are for a transition period to be secured by the end of March 2019, and for the withdrawal agreement completed as a legal document by autumn this year.

J. P. Morgan

But JPMorgan highlighted four concessions the UK is likely to have to make as part of negotiations.

Firstly, the EU-proposed “standstill” transition period, where the UK would still be bound by its EU obligations but lose its ability to influence EU decision making, is likely to occur, against the UK’s wishes.

Next, although the UK is seeking to replicate trade relations access as closely as possible, chief EU negotiator Michel Barnier has highlighted the limitations on future trading agreements if the UK insists on leaving the single market and customs union.

The UK also wants future trading relationships to be defined in detail alongside the withdrawal agreement, but the EU has argued it cannot legally instruct trade negotiators to begin this detailed work until the UK has formally left.

“The UK’s hope for early, legally-binding specificity around the future trading relationship is likely to be frustrated,” the note said, and has “never looked achievable.”

Lastly, “moving towards a resolution of the Irish issues likely will be problematic,” the note said, since the UK is “attempting to reconcile mutually incompatible objectives.”

The UK wants to avoid a hard border and leave the single market and customs union, while keeping arrangements for Northern Ireland aligned with those for the UK as a whole (ruling out a specific solution for the region), the note said. A solution would likely require a complex sector-by-sector approach, it said.