November 23, 2018 / 10:59 AM / 21 days ago

Breakingviews - Brexit vote plan is more twerp than TARP

British Prime Minister Theresa May and European Commission President Jean-Claude Juncker leave to discuss draft agreements on Brexit, at the EC headquarters in Brussels, Belgium November 21, 2018. REUTERS/Francois Walschaerts

LONDON (Reuters Breakingviews) - Flawed parallels with the financial crisis won’t save Theresa May’s Brexit plan. Back in 2008, panicking investors helped the U.S. government force its bank bailout through Congress at the second time of asking. The British prime minister might hope for a similar response if parliament rejects her deal to leave the European Union. But a replay is unlikely.

Chatter about a so-called “TARP scenario” has picked up since May unveiled her unpopular deal to leave the European Union. The U.S. government proposed the Troubled Asset Relief Program to prop up the financial system in September 2008. After the House of Representatives rejected it, the U.S. stock market plunged 7 percent. Congress promptly changed tack.

The same logic might apply to British parliamentarians if they vote down May’s deal next month. The theory is that the pound and equities would slide as investors priced in the likelihood of Britain leaving the EU without a deal in March 2019. Reluctant to be blamed, rebels would fall into line.

The theory has several flaws. A cliff-edge Brexit would hardly be a surprise; it has been possible since Britain voted to leave the EU in June 2016. The reaction may also not force a rethink. Analysts think the pound might drop by about 15 percent against the U.S. dollar – to around $1.10 – in a no-deal scenario. Yet the 14 percent slide in the currency since the referendum has not changed the political climate. With large British companies generating most of their earnings overseas, a lower sterling would perversely prop up their shares, as in June 2016.

A market selloff also depends on investors believing a cliff-edge Brexit is unavoidable. But if money managers think a second vote will produce a different outcome, they won’t rush for the exits as required.

The biggest hole in the TARP analogy, however, is that Britain’s crisis is entirely self-inflicted. In 2008, U.S. Congressmen faced a binary choice between government bailout or deep recession. If May’s plan fails to win support, parliament could call another referendum that might cancel Brexit. Indeed, May has warned anti-Europeans this could happen if they vote against her deal. For investors, that outcome would produce the opposite of panic.

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