Brexit: this is not a drill!

So, we are finally putting finger to keyboard again to write a post about “Brexit”- the risk of the United Kingdom leaving the European Union, as a consequence of a “No” vote in the referendum being held on June 23rd.

We shall not rehearse in any detail how the fact of this event risk came to pass, other than to say that the governing Conservative Party’s internal politics are largely to blame.

At Awbury, we find it somewhat odd that the “Yes” campaign appears so dysfunctional. The “No” campaign is not much better, but it has the easier slogans and “pitch”, and seems to be gaining some traction, even if the bookmakers’ quoted odds still just about assume a “Yes” vote. Opinion polls are “within the stated margin of error”, meaning that, prima facie, the outcome is too close to call.

The comforting thought is that, as in the Scottish Referendum last year, at the last moment a sufficient majority of the “people” will see reason and vote in favour of what they know, even if they do not particularly like it, rather than opt for what would be a very uncertain outcome. After all, an independent Scotland’s fiscal position would have been severely damaged by the collapse in oil and natural gas prices.

However, can one really be certain that “reason” and “rational self-interest” will prevail? There is a demonstrable level of distrust of governing elites; and the political classes are failing to make a robust and coherent case to rebut the anti-immigration, anti-Eurocrat and nationalistic “sound bites” of the Leave campaign, with some disturbing parallels with the current populist insurgencies in the US elections campaign.

The battle lies between the simplistic and the complex; and, in a democracy, it is very dangerous to patronize those who will vote because “we” know better; and so you should trust “us”. Having to explain often means you are losing the argument in a political system that promotes the “soundbite”. One may wish for some Churchillian rhetoric that will engage people’s hearts and minds and win the argument decisively; but it is, so far, sadly lacking.

As our title states, this is not a drill. It is the real thing, and a “No” vote will have real if, as yet, uncertain consequences, for the United Kingdom, the European Union, and for the wider world. What was, until very recently, seen as hypothetical now runs the risk of becoming very real; and any business that is not planning for the aftermath of a “No” vote is in denial, because the risk is no longer “in the tail”.

The day after a “No” vote, the world will have changed; and, because there is no precedent for such an outcome, scenario and contingency planning are essential, even though the more significant consequences (other than volatility in the FX markets and a probable change in government leadership) will be in the medium- to longer-term.

At Awbury, we have been monitoring the unfolding of the campaign as part of our regular “scanning of the horizon” and threat analysis, both to understand its potential impact on our own business, and to try to estimate the same for our partners and clients. We do not pretend to have all the answers, but would welcome a call from those who wish to discuss the risk and how we can help manage the credit, economic and financial components of it.

The Awbury Team

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