‘Real spillovers’: UBS boss tells Davos no-deal Brexit would do global harm
DAVOS — The volcanic effects of a no-deal Brexit would have unthinkable consequences for the global financial system and must be avoided at all costs, the leader of the world banking union has warned.
“An unmitigated, uncontrolled Brexit is the worst outcome we could imagine. Nobody wants this kind of tail-risk,” said Axel Weber, head of UBS and chairman of the Institute of International Finance (IFF).
“A no-deal would create real spillovers not just for the United Kingdom but for the European and for the global economy,” he said, speaking on the margins of the World Economic Forum in Davos.
Continued brinkmanship by both sides with just weeks to go before the withdrawal deadline on March 29 is starting to rattle nerves as far away as Washington and Tokyo. It is understood that IFF’s global board discussed the risks at a meeting in Zurich on Monday before the members went on to the Alpine resort.
London is home to 80 per cent of Europe’s capital markets and is the epicentre of the world’s US$660 trillion nexus of derivatives.
The City’s key role in the plumbing of global finance is poorly understood by leaders of most EU states and by officials in the European Commission, often lawyers with little feel for markets. This raises the risk of a serious misjudgment.
There could be major problems as swaths of contracts are suddenly reclassified even if there is a Brexit deal. An acrimonious rupture would threaten continuity of legal contracts and an instant financial shock. Weber, a former president of the German Bundesbank, said awareness was dawning that a no-deal would have dramatic implications. “I am of the firm belief that governments are coming to reason and will not let it happen. There has been a step up in discussions and I am confident there will be a deal at the 11th hour,” he said.
European banks are already in some distress as the eurozone struggles with a manufacturing recession, and the world’s central banks drain liquidity. The STOXX Europe index of bank equities has fallen by 35 per cent over the past year. It is close to levels seen in the depths of Europe’s debt crisis.
The business model of European banks is already in question as they are outflanked by technology upstarts. Chronically weak profits have left them trading at just 60 per cent of book value. The nagging concern is that many banks will not survive another major downturn.
I am confident there will be a deal at the 11th hour
Axel Weber, chairman, UBS Group
European banks have borrowed heavily on the offshore dollar lending markets, often on three-month maturities that have to be rolled over constantly. They lack their own dollar deposit base. This is inherently treacherous because these markets can seize up in a crisis.
Weber takes a contrarian line on the shifting moods of financial markets. Last year in Davos he poked fun at the elites for optimism “bordering on euphoria.” At the time central banks were tightening, China was slowing. Markets were priced for perfection.
“All investors were positioned on one side. Headwinds were going to lead to a major repricing,” he said. It happened in October, and again in December. This year investors may have swung too far in the other direction, toward pessimism.
Weber said central banks had read the writing on the wall and would keep the expansion alive with a dovish tilt. World economic growth is settling down to trend levels. There are signs of a trade thaw between Donald Trump and China’s Xi Jinping. Trump will do a deal just as he did over NAFTA.
“I think the tail risks are actually less severe this year,” he said. Brexit remains the wild card.