UK market rise following compromise shows Boris Johnson the benefits of a Brexit deal

Source:Global Times Published: 2019/10/15 19:33:40

British Prime Minister Boris Johnson (L) leaves 10 Downing Street to attend the reopening of the Parliament in London, Britain, on Sept. 25, 2019. British Prime Minister Boris Johnson faced enormous pressure as the parliament re-opened Wednesday after the Supreme Court ruled his act to suspend the parliament for five weeks was unlawful. Photo:Xinhua

Markets are showing British Prime Minister Boris Johnson the benefits of striking a Brexit deal. The pound bounced and shares in UK-focused companies rose after the prime minister and his Irish counterpart on Thursday declared that they had found a "pathway" out of their standoff. An agreement is far from certain, and UK parliamentary support cannot be taken for granted. But the advantages of avoiding a chaotic departure from the European Union are crystal clear.

When former prime minister Theresa May's previous Brexit deal ran into domestic opposition last year, some predicted plunging markets would force parliamentarians to vote it through. This "TARP scenario" was based on the US House of Representatives, which in 2008 reversed its decision on the Troubled Asset Relief Program to prop up the financial system after the US stock market fell 7 percent. That analogy was flawed. Though parliament voted against May's deal three times, investors did not panic because the Brexit deadline was extended.

Johnson now faces an inverse version of this scenario. With less than three weeks to go until that deadline, investors are increasingly nervous that the prime minister will follow through on his threat to take Britain out of the EU without a deal. 

Even the prospect of another extension beyond October 31 has done little to calm nerves.

That is why markets reacted so positively to the faintest glimmer of progress. The pound rose almost 4 percent against the US dollar in the 24 hours, after Johnson and Leo Varadkar, his Irish counterpart, issued their hopeful statement. Shares in UK-focused lenders such as the Royal Bank of Scotland and Lloyds Banking Group soared by more than 10 percent on Friday.

Johnson and Varadkar offered no details about a possible agreement, but senior EU diplomats told Reuters that the UK had accepted that an agreement could not result in the creation of a border in Northern Ireland - a major shift from Johnson's recent stance.

Even if the EU agrees, the Democratic Unionist Party, upon which Johnson's minority government depends, may not. That would leave the prime minister dependent on votes from the opposition Labour Party. 

If he fails to win enough backing, the most likely alternative is another extension to the Brexit deadline, followed by an election. Even so, the financial benefits of removing the risk of "no-deal" are clear.

The author is Peter Thal Larsen, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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