Brexit comment: “Theresa May must now return to Brussels on a wing and a prayer to renegotiate the Irish backstop”

by | Jan 30, 2019

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Managers from the Janus Henderson fixed income and UK multi-asset teams comment on the latest developments on Brexit following the votes in Parliament last night, looking the impact the outcomes have had on asset prices, and the outlook for the Brexit process:

Bethany Payne, Global Bonds Portfolio Manager at Janus Henderson: “The pound retreated as hopes of an extension to Article 50 were slashed. On Tuesday January 29, Parliament voted against taking control of Brexit proceedings for at least the next two weeks as Parliament failed to support the Cooper Boles amendments. Theresa May must now return to Brussels on a wing and a prayer to renegotiate the Irish backstop.

“Currency markets reacted negatively as this is currently seen as an impossible task. The EU aren’t seemingly willing to re-open the Withdrawal Agreement and the so called UK ‘Malthouse Compromise’ for a facilitated customs union and technological solutions to avoid a hard border in the island of Ireland would continue to just be a rerun of previous unsuccessful negotiations. While a no deal scenario is still unlikely, these developments increase the risk of accidentally leaving the EU without a deal and plans may intensify from both sides to manage that outcome.

“The successful Brady/May amendment did however provide much requested clarity to the EU that there is a majority in the UK Parliament for the Withdrawal Agreement if there is an agreed alternative arrangement to the Irish backstop. This leaves the ball in the EU’s court to choreograph a revised deal that would guarantee support in the House of Commons. If however, “nothing has changed” in two weeks and there is a failure to have a revised deal ratified by February 13th, then MPs will have another opportunity, on February 14, to vote to gain control of the Brexit process. An extension of Article 50, to allow time to pass legislation, also now seems increasingly likely.”

Paul O’Connor, Head of the UK-based Multi-Asset Team at Janus Henderson: “It says a lot about the state of the Brexit process, that the best victory the Prime Minister has achieved in some time, was when Parliament voted last night to rip up the draft Brexit deal that she has spent more than a year agreeing with the EU.  Mrs May now has been given a mandate to go back to Brussels to renegotiate the Withdrawal Agreement by attempting to replace its contentious Irish border backstop with “alternative agreements”. Within minutes of last night’s vote, the European Council President, Donald Tusk, dismissed this aim as futile, saying that: “The backstop is part of the Withdrawal Agreement, and the Withdrawal Agreement is not open for re-negotiation.”

“While it is nevertheless still conceivable that the EU might yet be persuaded to make some adjustments to the backstop, it is unlikely that these will be significant enough to satisfy the 317 MPs who voted for the backstop to be “replaced” last night. Time is an important dimension here. The Prime Minister said that she would try to renegotiate this deal by 13 February, giving Parliament another chance to vote on the deal that evening. Should it fail, MPs will have the ability to make further suggestions on how to proceed the day after that – happy Valentine’s Day Prime Minister. It is hard to avoid the conclusion that last night’s developments will achieve little more than running down the clock and we will be in a similar position in a couple of weeks to where we were before last night’s vote: a parliament that can’t deliver a majority vote on the Brexit deal on offer, nor on any of the other Brexit options such as no-deal Brexit, delayed Brexit, a general election or a second referendum.

“Still, some sort of decision will need to be taken before the end of March deadline has expired. While Parliament seems to be struggling to agree on anything, its overall opposition to a no-deal Brexit is one exception. This view was highlighted last night by another motion that received Parliamentary support – one that rejected leaving the EU without a withdrawal agreement. While that vote has no legal force, Parliament still has the scope to assert itself more forcefully on 14 February, if the government fails to deliver a revised deal that commands broad support. Under these circumstances, we still believe that the most likely outcome is that Parliament forces the prime minister to delay Brexit, avoiding a no-deal outcome for now but extending the uncertainty for many months into the future.”

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