Back in early April I observed in this commentary that I wasn’t really sure how much Brexit mattered, at least here in North America. Of course, looking back, I realized we issued it on April Fool’s Day and now I simply can’t remember whether I was being ironic or not. In any event, at that time we were exploring the notion that neither in nor out may ultimately affect the arc of the success of the European Union project, the health and viability of the City of London or CRE deal volume in the States.
But now that it’s happened…damn! We needed another disruption in this volatile economy of ours like we need a social disease. And while I am absolutely sure that a Remain vote would not have ended the ongoing debate about the future of Europe and its ability to get its sclerotic economy performing again, it sure would have been nice to at least take one issue off the table.
I listened Monday morning to Dechert’s excellent webinar (hey, I’m talking my book here, but, in fact, it really was excellent) on Brexit which can still be listened to through this link. If nothing else, the webinar reinforced the received wisdom that there are way more questions than answers, that there is a monstrous amount of legal work to be done all over the world to sort this out, and that transactional activity in the financial services business may be suppressed in the short term and indeed, to some extent, until the shape of the exit is clear. Very true in Europe. Maybe even a bit true-ish here. Net/net, no matter how fundamentally sunny our outlook, the slow motion transmogrification of the Europe we have learned to live with, if not love, into something that is certainly and clearly different will be sand in the gears of the capital market.
Will it drag the United Kingdom and the rest of the European Union into recession? Maybe. Although I note, the difference between in and out of recession in continental Europe seems mighty small to me.
For the financial services industry, it is really hard to see the City of London reduced to the equivalent of a Financial World Heritage Site where people go to look at where the world used to go to trade. I really can’t see all our bankers and all other financial service execs happily moving to Frankfurt. The talent is going to stay in London. I also can’t see international transactions conducted under any law other than that of New York or UK and therefore I see very little reason that the engineering bit of the financial services industry is likely to move. Also, just to put things in perspective, London remains one of the two financial capitals of the world writ large and not just of Brussels and the merry cohort of 27 feuding states.
In London, this is going to be disruptive in the short term. It’s going to be harder to get deals done with collateral, obligors, lenders or players domiciled or located in the European Community, although I have heard some suggest that, like most change, it will produce winners and losers. Assuming Article 50 (which a few weeks ago was known only to a few EU legal geeks, but is now fully jargonized by the business media) is triggered sometime in the fall, a process will begin and then the process will become the new reality. We might even forget, for a time, where the process is supposed to get to, as the process goes on and on and on. We’ll all get used to it. What’s a wee bit more uncertainty?
In the States, the impact should be considerably more muted but let’s face it, we really don’t need more volatility in a world that had about as much fun with volatility as it possibly can have. My guess, however, is that there’s really no such thing as 20% more uncertainty. It just is. In any event, uncertainty is a miasma that quashes conviction and slows transactional velocity and that seems to be the new normal. Brexit doesn’t really change that. Doesn’t make it better; doesn’t make it worse.
The pity party in the equity markets on both sides of the Atlantic is over and now we are moving on. The U.S. bond markets (and indeed Europe ones as well) haven’t reacted with anywhere near the ferocity of the equity markets which contracted violently and with treasuries so deeply suppressed, we continue to have plenty of headroom to sell securities backed by financial assets and continues to earn reasonable spreads. This means that our debt capital markets may have caught a summer cold but not pneumonia. On the other hand, with the UK and Europe so disrupted, maybe this will encourage more inbound investment before the pound and the Euro weaken further.
Look, there is something to the notion that at some point that one last piece of straw, that one last “wafer thin mint” (see Monty Python), will break the camel’s back, but I don’t see it here. This isn’t Lehman; it’s not 2008.
At the end of the day, this vote will be more disruptive inside the European Union, more disruptive to the notion of ever closer union, more disruptive to the commitment to homogenized monetary policy with disparate fiscal policy than it’s likely to be to anybody else. It will ultimately be more disruptive inside Europe than in the relationship between London and Brussels as the reality of London’s need for Europe and Europe’s need for London overwhelms the Europeans pique at Perfidious Albion and overwhelms the emotive and nativist, nationalist hostility of the United Kingdom (or maybe just England now) to the European experiment.
So in the U.S., we’ll sigh, we’ll “tut, tut” and get back to business as usual. Something, someday will again be a Lehman moment, but this doesn’t seem it.
So in classic English style, keep calm and carry on.
