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Borrowing in the face of a hard Brexit

August 16, 2018

 

The confirmation of a hard Brexit could significantly impact the lending market. Developers would do well to borrow now, to avoid facing an uncertain financial climate.

As Britain is approaching 29 March 2019 – the official date for leaving the European Union, the probability of a hard Brexit seems all the more realistic. Despite the recent increase in the interest rates announced by the Monetary Policy Committee (MPC), the sterling was still under pressure after the U.K. International Trade Secretary, Liam Fox, commented that the likelihood of a no-deal outcome is as high as 60 per cent.

This suggests that a hard Brexit scenario will inevitably result in a weaker Pound, in turn, putting pressure on the Bank of England to take further action to support the domestic economy, as inflation will be “imported” into the financial system and there is additional uncertainty regarding future trade. According to Bloomberg analysts, the sterling could drop further by about 10 per cent as markets grow increasingly nervous about the impact of ineffective UK-EU negotiations.

In a scenario where the Pound hits parity with the Euro, the committee would need to significantly spike up interest rates and make aggressive comments regarding further monetary tightening in the short-term future. With the danger of a mass short selling of the Pound, we can look back on George Soros’ strategy of betting over $1.5 billion against the Pound in 1992, before the devaluation of the currency that followed a month later.

Soros went through with his trade, despite the Bank of England using bullish language to suggest that it would buy the Pound, to bolster confidence levels in the markets and prevent speculation. His move let to a subsequent rise in the interest rates by a full two percentage points, to prop up the struggling Pound. The situation that Britain is currently facing involves similar risks and would, in turn, significantly harm the future of the lending environment.

With lenders keeping their focus on the upcoming MPC announcement in February 2019, developers should be rethinking their borrowing strategies both for the short- and long-term future. Given the high probability of the banks adopting a period of ultra-conservativeness following a hard Brexit, developers should consider obtaining loans before lending conditions might become uncertain.

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