the times | Saturday October 17 2020 2GM 51

Business

Betrayal of financial services shows

government failure in Brexit talks

were granted to give “EU market

participants time to reduce their

exposures to UK [clearing houses]

and give EU [clearing houses] time to

build up their capability”, the financial

services chief Valdis Dombrovskis

said. Like the equivalence ruling, it

was a land grab, plain and simple.

As Boris Johnson told Britain to

prepare for “no deal” yesterday, the

outcome for financial services is a

reminder of how far the government’s

ambitions have fallen. In February, a

briefing paper showed the UK hoped

to secure “permanent equivalence”

for the City that would last for

“decades to come”. The goal was

embedded in the political declaration

that Theresa May signed in 2018 and

which Mr Johnson tore up this year.

Even then, however, Mr Javid

believed a financial services deal

could be a template for broader

“regulatory co-operation

arrangements” in other services

industries. Mark Carney, then Bank of

England governor, was similarly

campaigning for outcomes-based

“super-equivalence” that would set a

new standard for multilateral

collaboration. The EU would concede

because losing direct access to

London’s deep capital markets would

cost too much to bear, they claimed.

Now we’re being told that no deal,

or what the prime minister calls an

Australia-type deal, would be a “good

outcome”, even if it means a

desperate scramble to prepare our

ports and borders. Yet only last

December, on the campaign trail, he

said he could “absolutely guarantee

that we will get a deal” — not just any

deal but the “great deal” he drove

through parliament. None of their

words are worth a counterfeit fiver.

Brexit talks aren’t over yet and if

there is one cast-iron rule of EU

negotiations it is that things only

move at the very last minute. But

whatever happens in December, there

will be no deal in financial services.

That issue is concluded and should be

seen as a stain on the government’s

record. Senior industry figures

describe how the UK drifted into a

For a measure of the

government’s

shrunken Brexit

ambitions, look at

what’s happening in

financial services. The UK is about to

go “no deal” on one of its most

cherished industries. No matter

whether the government strikes a

thin Brexit trade agreement, which is

now the best that can be hoped for, or

fails to secure anything, as looks more

likely than ever, the die is cast for the

City. There is nothing in the

negotiations for a sector that accounts

for 6.8 per cent of GDP, employs one

million people across the UK (two

thirds outside London) and pays

£75 billion a year in taxes.

Brussels has walked over us and,

frankly, the government no longer

cares. What matters is fishing,

accounting for 0.1 per cent of GDP

and employing 24,000 people, and

state aid, to deliver a semblance of

sovereignty. The remaining goals

serve the narrow politics of levelling

up and taking back control, even if as

many jobs are lost in finance as are

saved in coastal communities.

Perhaps enough for the Brexit purists

but no one could call it a victory.

Brussels made it clear in July,

shortly after the option to extend the

transition period into 2021 expired,

that UK investment banking would

not be declared “equivalent” from

next year. To continue trading in the

EU, Britain needs an “equivalence”

ruling to replace the “passporting”

regime enjoyed by member states.

Financial regulations are aligned now,

which is why Sajid Javid, in his last

weeks as chancellor, said in February:

“As we leave the EU with the same

rules, achieving equivalence on day

one should not be complicated.”

It should not have been, but it has

proved too much for this government.

Brussels played hardball, using a

technical review as cover to remove

investment banking from the

equivalence regime. Andrew Bailey,

the Bank of England governor,

clocked the trick for what it was. As

he told MPs last month: “It is

interesting, I use my words carefully

here, that the largest amount of value

is in article 47 [investment banking]

equivalence.” A few days later, the EU

declared clearing houses equivalent

for 18 months from January but only

because rewriting £43 trillion of

derivatives contracts posed a threat to

financial stability. Eighteen months

Philip Aldrick

Britain has

credit rating

downgraded

as debt rises

Philip Aldrick Economics Editor

Moody’s has lowered the UK’s sover-

eign debt rating by one notch to “Aa3”

from “Aa2”, citing weakening economic

and fiscal strength stemming from

Brexit woes and coronavirus-induced

shocks.

“Even if there is a trade deal between

the UK and EU by the end of 2020, it will

likely be narrow in scope and therefore

the UK’s exit from the EU will, in

Moody’s view, continue to put down-

ward pressure on private investment

and economic growth,” the ratings

agency said last night.

The downgrade came as the rival

agency Standard & Poor’s warned that

some of the world’s richest nations,

including Britain, face credit rating

downgrades after the explosion in

public debt during the pandemic.

S&P held the UK’s rating in April at

AA with a “stable” outlook but the debt

pile has increased as the government

provides further support for the eco-

nomy. The country lost its AAA rating

following the 2016 Brexit vote.

Fitch, another ratings agency, down-

graded the UK in March to AA-, citing

the debt increase.

A cut in the UK’s sovereign rating

means that the country is considered to

be at greater risk of default and signals

to investors that they should charge a

higher interest rate. In practice, rating

downgrades have not affected Britain’s

ability to borrow or the price.

A downgrade by other agencies

would not come as a surprise as the debt

has jumped from 85 per cent of GDP to

more than 100 per cent this year.

Since the start of the year, borrowing

costs on ten-year government debt

have fallen from 0.8 per cent to 0.175 per

cent following a cut in interest rates

from 0.75 per cent to 0.1 per cent,

despite the huge increase in debt.

Even so, the International Monetary

Fund has forecast that the UK will have

the third lowest debt to GDP ratio of the

G7 advanced nations this year, behind

Germany and Canada but ahead of the

US, Japan, France and Italy.

The UK was spared by S&P in April

and is likely to be on its hit list now. The

agency has downgraded the outlooks

on nearly 60 countries this year, but few

have been higher-rated rich nations.

Australia’s AAA rating, Italy’s BBB and

Spain’s A are all on notice.

Roberto Sifon-Arevalo, S&P’s lead

sovereign analyst, told Reuters: “We are

going through the revisions. Now, and

over the next few months we will

continue to do so.”

hard Brexit for banks as officials

quietly gave up.

At least the banks are ready. They

have set up subsidiaries in Dublin,

Paris and Frankfurt to continue

serving EU clients and more staff will

move as more business shifts to the

Continent. Will Wright, founder of

New Financial, a think tank, says

“Brexit will rewind the clock about 20

years” — not devastating for the City

but enough to diminish it. According

to the consultants Oliver Wyman,

half of UK financial services relates to

domestic clients and a quarter to the

EU. Some, but not all, of the EU

business will migrate. The big

unknown is how much of the

remaining overseas trade uses

London simply as an EU gateway.

Technically, the UK could choose

equivalence — just as we could

choose to cave on fisheries and state

aid — but it is not worth it. There,

too, the parallel between financial

services and the broader Brexit deal is

striking. When the best alternative is

poor, the trade-off changes. Without

super-equivalence, Britain has to be a

passive rule-taker to access EU

markets. In return we would recover

£10 billion of the UK’s £300 billion

financial services revenues. Against

that, the attractions of no deal

multiply. We would no longer need to

apply rules that add unnecessary

costs for smaller banks, complicate

monetary policy and weaken the

resilience of big lenders, as the EU

leverage ratio does. “The precise,

textual version of equivalence is not

great for competitiveness or financial

stability,” Alex Brazier, an executive

director at the Bank, told MPs last

month. Yet it’s a trade-off we were

told would not need to be made.

The economic cost of Brexit is not

what matters any longer; the

electorate was clear on that. Besides,

it won’t be the first time that politics

has proved expensive. The Land

Compensation Act 1962 was far more

ruinous by turning us into a nation of

debt-hungry property speculators but,

unlike Brexit, the counterfactual was

never calculated. It is by the promises

it has made that this government of

Brexiteers should be

measured. To judge

from financial

services, it will fall a

long way short.

‘‘

’’

Philip Aldrick is Economics Editor of

The Times