Brexit Watch: Game of votes

Theresa May's at the end game. Morten Lund assesses her chances of pulling a rabbit out of the hat on December 11 and getting her Brexit deal through.

Goodbye or just au revoir? The fate of Britain lies in her hands. Can she steer a path through troubled parliamentary waters or is it the end of the road? Source: Christopher Furlong/gettyimages

It is finally here. The big season finale of the Game of Votes. Thus, following five days of debate (December 4-6 and 10-11), the fate of Prime Minister Theresa May’s Brexit deal will be decided by a simple majority in the House of Commons on the eve of December 11.

Although the deal would still need to pass an implementation legislation in both houses of Parliament as well as be approved in the European Parliament (and formally also the EU Council despite the acceptance November 25) after that, we believe this so called “meaningful vote” is the real test for May’s Brexit deal. If May fails to secure a majority next week, the game opens up with a wide range of adverse outcomes.

The question now is whether Theresa May can win the ‘meaningful’ vote. According to voting inclinations, this is unlikely – at least in the current draft version. Thus, the choir screaming about deficiencies in the PM’s Brexit plan has become very vocal, with several MPs in turn pointing out that the deal is far from gaining a majority.

Brexit timelineSource: Nordea Markets

The deal will not pass, if MPs vote as indicated
Digging into the vote mathematics, the House of Commons consists of 650 MPs. Of these, the Speaker and his three deputies don’t vote. Nor does the party Sinn Fein (seven seats). That leaves 639 MPs, so if everyone votes, 320 is the de facto threshold May needs.

Our guestimate is that around 145 MPs of different kinds of government payroll (27 cabinet ministers/attendants, 65 on government payroll, 50 ministerial assistants and three whips) as well as roughly 75 Conservative loyalists will vote in favour of the deal. In addition, one Liberal Democrat has confirmed he will support May’s deal. That totals 221, i.e. 99 votes are missing to reach the 320 benchmark.

On the flipside stands the opposition parties, eight independents, 79 Tory “rebels” (26 “no-confidence” voters, 13 resigned from government and 40 expected “rebels”) and 16 undecided Tory members.

Assuming the 16 undecided Conservative MPs and three (expected) independents support the deal, then May would still need another 80 votes to seal the deal – most likely amongst the 257 Labour MPs. In our view, this seems rather unlikely, as Labour officially does not support the deal (they have six tests for accepting a deal, which is designed not to accept May’s proposal).

In sum, the deal will not pass, if MPs vote as they say they will. This also seems to slightly be the consensus in the financial markets when looking at indicators such as GBP risk reversals, surveys and speculative sterling positioning.

However, bear in mind that there is evidence of UK MPs voting against their public statements (as for instance was the case with the no-confidence letters in November). In this sense, the key to success for May is, in our view, to convince enough Labour rebels that her deal is in fact the only option left on the table besides the feared no-deal scenario. Currently, many MPs seem to be under the impression that there is still time to renegotiate the deal before the  March 29 deadline.

Theresa May’s chances of securing a majority look unlikely

When you play the Game of Votes, you either win or you…?
Many analysts and political commentators believe that May has now rolled the dice, leading either to a tremendous victory or doom and gloom with her being forced to leave Downing Street no. 10. We, however, see more possible scenarios at hand:

As illustrated above, we see five likely scenarios unfolding if Theresa May’s deal does not gain a majority 11 December:

Deal is passed at the second attempt: This is our base case. Although the time pressure and recent statements from May and several EU leaders indicate little room for amendments, the MPs will most likely at the time (probably in January) feel the March 29 deadline breathing down their necks and effectively be faced with a binary choice between an “adjusted May-deal” or a cliff-edge no-deal. As there is only a small minority in the Commons supporting a no-deal, and the MPs will feel the pressure from financial markets, companies and households, we expect a majority will be found at the eleventh hour. Hence, pragmatism will win.

General election: A general election can only be called if a) two thirds of the MPs in the Commons agree to an election or b) a no-confidence vote is called against the Government. We consider option a) very unlikely, as many Tory MPs may fear losing their seats due to Labour’s performance in recent polls (and the still fresh memory of the poor election result in 2017). In this regard, a no-confidence vote within the Conservative party is preferred by MPs (see no confidence scenario, below). Although still a tail risk, option b) looks more viable. Thus, Labour proclaimed during the weekend that it will call a motion of no-confidence if May loses the vote on her Brexit deal. Furthermore, supporting party DUP has recently voted against the Government’s budget legislation because of Brexit, threatening to abandon the “confidence and supply” agreement for good. However, speaking against this option is that the DUB has never enjoyed such power before, with leader Arlene Foster being hailed as a queen after securing extra funding to Northern Ireland in payment for the support.

No-confidence vote in the Conservative party: A reignition of Jacob Rees-Mogg’s no-confidence quest against May is plausible – especially, if she loses the ‘meaningful’ vote” by a large share. However, given how difficult it was in mid-November to collect just 48 Tory letters, we consider it more likely that an eventual leadership election would be triggered by May herself (resigning) than Rees-Mogg being able to collect 158 Tory votes (simple majority) to oust the PM. Looking at possible replacements and considering the time span in which the leadership election process normally takes, the risk of a no-deal would in our opinion increase significantly.

Second referendum: This one is tricky. One question possibly posed could be ‘remain or leave’ (aka. ‘People’s Vote’), while another could be May’s ‘deal or no-deal’. We consider the former very unlikely (see arguments here), while the risk of the latter is higher on the margin. Thus, she may come to believe that breaking the deadlock in parliament is impossible, therefore leaving the ultimate decision to the people. This would, however, be a risky move and most certainly require an extension of the March 29 deadline (only possible by a unanimous decision by EU27).

No deal: The UK crashes out of the EU without a Withdrawal Agreement and a Political Declaration in place. WTO rules would be applied and at worst, scarcity of crucial goods such as food and medicine could become reality (see here what it would mean for the GBP and the BoE).

If May’s deal does not pass the vote on December 11, we estimate the risk of the different Brexit end-game” scenarios – hence excluding ii) general election and iii) no-confidence vote – as 50% probability of a deal passed in second attempt, 40% risk of a no-deal and 10% chance of a second referendum. As mentioned above, we think the risk of a no-deal scenario would increase significantly if either a no-confidence vote or a general election happen. Moreover, we believe a deal under these scenarios are only possible if the March deadline is extended.

Market reaction
Although the odds are clearly against May, we do not think the markets have yet fully priced in a defeat, leaving room for a EUR/GBP rally short-term. Hence, we expect the sterling to depreciate around 3-4% in such a scenario. In terms of broader repercussions of a May-defeat, we would expect an initial sell-off in the FTSE 100, despite the historical inverse relationship with the GBP, while the UK yield curve would drop around 10-15 bp, as markets still seem to ignore the warnings from the likes of Bank of England governor Mark Carney that it would cut rates in a no-deal scenario.

If, on the other hand, May wins the vote, we expect EUR/GBP to move down to levels around 0.83-0.85, the FTSE 100 to rally and a rate hike in H2 2019 to (again) be fully priced in.

Read more about our Brexit house view, including effects on Bank of England and the GBP here: https://ndea.mk/2NGUfYS.

Let’s talk: PM Theresa May will no doubt welcome the opportunity for some intelligent conversation. Source: WPA Pool/gettyimages

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