Fra BNP Paribas:
Markets seem to have started to come around to our view that a ‘no deal’ Brexit is likely to be avoided and that the UK is likely to seek to delay its departure from the EU.
However, we would caution that no deal has not been ruled out. Nor is extension of Article 50 guaranteed without a good reason – which is not yet clear.
Our base case remains that MPs will be unable to find a way through the current logjam, and that a second referendum is the most likely ultimate outcome. But we think the chances of Parliament passing a withdrawal deal have risen a bit recently
Recent developments give us greater confidence in our base case that Article 50 will be extended, with a second referendum likely the outcome – or even a precondition – for an extension. Even if this proves to be correct, however, we expect a bumpy ride.
No deal not ruled out, extension not guaranteed: There is no clear majority in Parliament at present for the negotiated withdrawal deal, a general election or a second referendum; the only thing there does appear to be a majority for is avoiding no deal.
On 29 January, Parliament will vote on allowing a bill to be debated and voted on that would give the government until 26 February to get approval for a withdrawal deal and, failing that, would force it to seek an extension of Article 50 until 31 December 2019.
We think this amendment, tabled by an opposition backbencher, Yvette Cooper, has a good chance of passing – positive, in our view. Any amendment that would explicitly revoke Article 50, in contrast, would be unlikely to pass.
Unlike a revocation (a unilateral decision), extending Art.50 would require unanimous EU27 consent. We do not think the UK could currently give the EU a clear purpose for such an extension. Nevertheless, an extension seems inevitable to us now. It could be a short one to provide time for formal ratification of a deal or a longer one for something exceptional, such as a second referendum or general election.
Referendum still most likely: We still think a second referendum is the most likely outcome, though this might not become clear for a while. The parliamentary arithmetic still looks challenging for Prime Minister Theresa May’s deal, absent significant (and, in our view, unlikely) changes to the Irish backstop. We would note that recent events appear to have
softened Eurosceptic MPs’ opposition to the deal, faced with the prospect of no Brexit.
Moreover, the EU might well offer something, such as a more concrete review process over the backstop, which could bring more Eurosceptic MPs on side. We think there is probably a slightly higher chance of a deal passing than there was a few weeks ago. Our implied probabilities are now as follows: no deal 20%; deal 30%; referendum 35%; general election 15%.
