Brexit: the five stages of grief

Having spent the week after the vote in London around various bankers and asset managers, FIG Australia head of Institutional Andrew Palmer was at the centre of the fallout.

"For me this was the impossible result. Surely the British people would not self-destruct in this way?"
Andrew Palmer, Head of FIG Australia, Institutional

Below, he shares his impressions on the week – which by chance vaguely trace the ‘traditional’ five stages of grief – albeit with no call yet for the last rites.

DENIAL

I landed in Britain at 0700 on the morning of the Brexit announcement. A baggage handler actually informed me of the result. I have to say I thought he got it wrong so I asked the immigration official checking my passport to confirm.

For me this was the impossible result. Surely the British people would not self-destruct in this way? My taxi driver from the airport was so passionately delighted he was knocking off at 1000, after he dropped me off, to go to the pub with his friends to celebrate.

Clearly a large amount of people felt passionately the EU was very bad for Britain and membership was holding the country back.

Over the weekend the press was scathing of the "lies" told about the benefit of exiting and was focused on exactly how the government could reverse or ignore the result coming out of the referendum.

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ANGER

On Monday and Tuesday I spent my time meeting with senior executives of the four major British banks – the same institutions whose stock had been hammered by 30 per cent since the Brexit announcement.

While meeting with Barclays their stock hit stop-loss levels and was actually suspended. Those we met with were in a state of shock and could not believe 14 million Britain’s could be so “stupid”.

Anyone you spoke to in the City – London’s financial centre - was bitter with the populous, the Prime Minister for calling the referendum, the rest of Europe for letting the EU become so dysfunctional and anyone who had spoken out in support of such a horrendous outcome.

The banking community was whipping itself into a frenzy about how calamitous the outcome was and the feeling the country was destined for recession at best and ruin at worst.

BARGAINING

By Tuesday night it seemed the only outcome was for the British Government to use the vote to renegotiate the terms of membership, as it was in nobody’s interest for Britain to leave.

Surely the other members would cave on immigration to keep a strong and powerful EU intact?

Britain’s membership was crucial to all parties, not just from a scale point of view but also as a mediator between France and Germany.

There had to be a compromise which kept Britain in but gave the British Government enough to be able to go back to the people as say “here you this is the new Europe we don’t need to leave”.

Sense would prevail.

DEPRESSION

On Wednesday we were off to Frankfurt to meet with the major German banks. It would be interesting to see what they thought they would need to give to maintain the status quo.

From the first meeting to last the message was clear – don’t even dream about it. Britain has a good deal and no concession was even worth considering. What’s good for the other 27 states should be good for the Brits.

There was no bargaining to be done and Britain was destined for the scrap heap. It was their own doing and they deserved it. Ouch. 

Over the next 24 hours it became clear that key markets like Eurodollar clearing were headed to the continent. Three asset managers I met had already dispatched people to Dublin to look for office space as they worried about the status of passporting, a key enabler of the funds management business facilitated by EU membership.

Another interesting anecdote was one leasing company which would now be forced to pay more for European cars and could no longer sell the vehicles to Eastern Europe at the end of the lease.

Thus the purchase price would be higher and the residual value lower. Not a good scenario. London, Britain was doomed and there was no way back.

ACCEPTANCE

By Friday the departure of Britain from the EU was a fait accompli. The Prime Minister had resigned and Boris Johnson had been "stabbed in the back", as the media put it, by his closest ally. Even the Labour opposition could not decide who should lead them.

The stock market had staged a significant recovery, the bond market had reopened with two corporate issuances and even Lloyds Bank was able to raise $US1 billion of five-year paper.

Politics, rather than economics, had taken over as the major concern. One of the senior bankers I met was actually quite optimistic and compared it to when Britain dropped the peg to the common currency in 1992. He noted the following 14 years had average annual growth in excess of 3 per cent. And the government had stated before the Brexit referendum it wanted to reduce the country’s dependence on the finance sector (20 per cent of GDP).

That was clearly going to happen and the 15 per cent devaluation of the pound was a massive injection/subsidy to the British economy with more to come.

Yes, some financial sector jobs would move to Dublin, Paris and Frankfurt but London was literally bursting at the seams anyway.

The EU was broken and dysfunctional and needed to be restructured. Britain would not be a part of that process but would get the opportunity to rejoin if it liked what was produced at the end of the process. The whole of Europe recognised the EU was not working in its current state but the British people had sent the strongest possible signal to Brussels that it needed to be addressed and urgently.

The Dutch were heading towards a referendum and unless something was done everyone would eventually head for the door.

CONCLUSIONS

So after a week in the Intensive Care Ward, if not the palliative care ward, my conclusions:

• Britain will leave the EU. The pound will continue to devalue but the government will support the economy through fiscal expansion. A small amount of inflation will develop but it won’t be a major issue.

• There will be a downturn in economic activity as companies delay investment and hiring. Some activity in the financial sector will migrate offshore but will be offset by a softer pound, higher government spending and a reduction in interest rates.

• The EU will recognise the urgent need for restructure and quickly start to work on an overhaul. It will start the process quickly but make slow progress in getting to a satisfactory outcome.

• Britain will sit on the sidelines, focused on renegotiating trade agreements around the world. By the time the EU agrees on a new constitution, Britain will have a free option on whether to rejoin.

• London will remain the financial capital of Europe. There will be geographical disruption to the financial sector but very few problems with the credit of individual companies.

Andrew Palmer is Head of FIG Australia, Institutional