Fra BNP Paribas:

Three key developments this week could shape the future of Brexit. Overall, we think they have reduced the chances of a disorderly outcome. First, the UK government was found in contempt of parliament for withholding its legal advice on the Brexit Withdrawal Agreement – a first for a UK government.

While the advice itself did not tell us much that we did not already know, the fact that the
Government lost the vote indicates it can no longer muster a reliable majority. This will make passing any piece of legislation more difficult.

Second, the Advocate General of the European Court of Justice’s legal opinion that Article 50 is unilaterally revocable, opens a door to cancelling Brexit that was closed, or at least uncertain. Finally, and most importantly in our view, Conservative MP Dominic Grieve’s amendment to the Withdrawal Act puts Parliament back in the driving seat following the likely rejection of Theresa May’s Brexit deal at the ‘meaningful vote’ on 11 December.

Any subsequent motions will be amendable by MPs, for example to instruct the government to prepare for a second referendum, an extension or revocation of Article 50, or to seek changes from Brussels.

We disagree with the notion that the probability of ‘no deal’ is now 0% purely on the basis that there is no majority for it in Parliament. After all, no deal is still the default option, unless a deal can be ratified ahead of 29 March, or Article 50 is extended or revoked. And
note that the AG’s opinion is not legally binding – the ECJ could yet rule differently.

There appears to be little scope for renegotiation of the existing deal. And while our base case remains that a deal will be ratified eventually, paving the way for an ‘orderly’ Brexit, there is a big risk that there is no majority for any alternative deal. Meanwhile, the revocation of Article 50 would require Parliament to cancel Brexit altogether, which again seems like a big jump from where we are now, especially without a renewed mandate via either an election or a referendum.

The Advocate General’s opinion made it clear that a revocation cannot be used as a delaying tactic Brexit, with a country re-triggering it to re-set the two-year negotiating clock. An extension of Article 50 still requires a unanimous vote by the EU27, which is not
guaranteed. It seems unlikely the EU will allow an extension purely to continue to go round in negotiating circles, but might grant one if it was for a specific end, eg a referendum.

This week’s developments underline our view that there is a 90% chance Parliament will reject the deal next week, and by a significant margin (likely 100-150 MPs). This could lead to a number of other risks, including a confidence vote in Theresa May that might trigger a leadership challenge, and/or a confidence vote in the Government by opposition leader Jeremy Corbyn that could ultimately lead to an early election.

Overall, we view recent events as net positive for UK assets but would caution against being overly complacent that the adverse tail risks have been virtually eliminated. There is still useful information to come, including the ECJ’s final ruling, any further amendments, and next week’s meaningful vote. For now, we maintain our probabilities on the outcome
(50% deal, 30% no-deal, 20% no Brexit).