Hammond to Wall Street: Brexit Won’t Tear Us Apart
The uncertainty of Brexit and Theresa May’s recent confirmation of a Hard Brexit—abandoning completely the fruits of the EU single market—is making many financial services firms worry. A number are already considering moving their operations or parts of their offices to other European capitals like Dublin, Paris and Frankfurt, while New York’s global financial position is also a possible contestant for others.
The loss of EU passports will massively affect the City’s financial sector which is, weirdly enough, one of the bigger supporters of the Tory party.
Without passporting and the financial firms locked outside the EU, Britain will have a drop in “invisible earnings.” The trade of physical goods might also see a fall. There are also fears about the current account deficit which will become even worse if the pound continues its wayward journey. (On Friday, 7 October, the pound dropped to $1.244).
• Invisible earnings: Invisibles are the earnings from transactions happening abroad relating to services such as insurance, banking, tourism and shipping. For the UK, which relies on invisible earnings, particularly international income from financial services, the lack of access to the European market will be devastating.
• Current account deficit: It’s a way to measure a country’s foreign trade. It shows the negative sales abroad. When the value of goods and services a country exports are less than the value of goods and services it imports, then the country has a current account deficit. This is why a country can reduce its current account deficit by exporting more goods and services. It basically means a country is spending more money than it’s making. But in some cases, a current account deficit might not be a bad thing if debt, for example, is turned into profitable investments.
The Bank of England governor, Mark Carney, is also in a vulnerable position after Theresa May’s attack on the Bank of England’s monetary policy. She had said that QE and very low interest rates badly affected savers and the poor while helping the rich. Many are wondering whether Carney will stay until the end of the year or complete his 5-year service.
Wall Street Visit
On Thursday (6 Oct.), Chancellor Philip Hammond went to New York to promise Wall street power brokers that London will remain a global financial centre after Brexit and that they have nothing to worry about. Top executives from Citi, BNY Mellon, Morgan Stanly, Goldman Sachs and others, which together employ more than 25,000 personnel in the UK, met with Hammond.
In politics, a power broker is a person who influences others to vote for a client in exchange for political or financial gains. A power broker might be an official, a business executive or a powerful person with a lot of connections. These bureaucrats and powerful elites are the kind of influential individuals whom Theresa May despises, as she made clear in her speech on Wednesday.
The Chancellor of the Exchequer, Philip Hammond’s mission was threefold: to explain what Hard Brexit means, what the Prime Minister’s talk about a bad international elite and what her criticism of the Bank of England mean. These are pressing questions especially when Theresa May’s attitude towards business and financial executives hasn’t been the most positive. Wall Street executives would like to be reassured.
With 70,000 jobs to be washed down the drain, and a cost of £10bn in tax receipts in case of a Hard Brexit, things are looking pretty bad.
Hammond’s Bloomberg Interview:
Philip Hammond gave an interview to John Micklethwait at Bloomberg.
Questioned about Soft or Hard Brexit, Hammond said that the UK wants to get the right kind of Brexit. The financial services sector is valuable and it’s a priority to get the right solution with our EU partners, he said.
Euro clearing: Hammond said that that the ECB can’t require clearing to move, but that wasn’t clear yet. One of the big questions about the City of London is whether it will be still allowed to clear euro-denominated derivatives. The City has 70% of the business, with France being its closest competitor. The UK is the largest Euro foreign exchange transactions market and the largest interest rate derivatives (forward rate agreements, swaps, options and other financial products) market in the world.
Being an EU member, the UK was able to handle clearing operations for the Eurozone which, according to French president François Hollande, it won’t be able to do anymore after it leaves the EU. But clearing euro only within the Eurozone is a sign of Europe protecting itself and might be seen as France trying to pull business to Paris or the EU punishing the UK. London has a $570 billion daily euro derivatives trading industry and to take that away from the UK “would be a legal process that would take time,” Hammond said.
Immigration and wages: He said that there was pressure on low entry jobs: “The problem isn’t highly qualified people with high earnings because they recognise migration is positive. But low skilled people don’t recognise the positives of immigration because they have to compete with low-skilled workers.”
Passporting, equivalence: He said that the UK government will ensure that UK companies will continue to do business in Europe. “The aim is for banks to retain access to Europe. We are listening to finance and their nuanced needs,” he added.
He said that Article 50 was inserted but without real use, so both sides need to agree how to go about it.
He stressed that for both the EU and UK it has to be a win-win situation. “This is a negotiation, we understand each other’s positions, but now it’s time to get engaged,” he said. Hammond added that he was never involved in a negotiation where both parties’ position stayed the same until the end. So, he appeared hopeful that UK and EU negotiations will lead to an advantageous solution for both parts.
UK Economy: While media is focusing on older data that seems to show a strong economy, Brexit means a period of structural adjustment. “Growth will slow” as we go through this period of negotiation and as we get a clearer image of what is going to happen, he said.
He also said that Mark Carney is doing “a good job” and that the BoE has acted “effectively,” smoothing the process after the UK referendum. The shock of Brexit will open towards a period of uncertainty and there is a need to support this through careful investment. He said that he believed that there are “long-term benefits to Brexit.