Brexit podcast: PM facing a vote of no confidence - what happens next?

12 Dec 2018

Ryan Djajasaputra

Economist

Whatever the result of Theresa May's no-confidence vote, it will likely have an impact on Brexit scenarios. Listen to our analysis on the immediate developments. 

Listen to our analysis

Where is the Brexit timeline heading now in the light of the PM facing a vote of no confidence?

Question 1

Considering the SME lending market has been resilient, and very much business as usual, could you comment on the outcome should this backbone be broken?

Question 2

Regarding tonight’s vote, should there be an overwhelming majority, what implications would this cause for the markets and sterling?

Discover how the Investec Treasury, sales and structuring team can help change the way you do business

Question 3

Could you take us through the mechanics should the withdrawal agreement be delayed beyond March 29, especially if there is a leadership change.

Question 4

What is the best case scenario for sterling sellers/currency buyers over the next week?

Question 5

What are the consequences for British democracy and politics if a second referendum is enacted?

Question 6

In addition to the challenges the vote of no confidence presents, what else should we keep an eye out for in Europe?
Please note: these podcasts are provided for information purposes only and should not be construed as an offer, or a solicitation of an offer, to buy or sell financial instruments. These podcasts do not constitute a personal recommendation and are not investment advice.

Podcast transcript

Good morning all, and thank you for joining us this morning, to discuss Brexit. Obviously, things are moving pretty quickly, particularly over the last 24 hours or so. I would say the situation still remains very uncertain; I think it’s hard to say exactly what’s going to happen in the months ahead, but we’ll certainly try and at least provide some thoughts on our views on what’s going on.
 
Just some background, very quickly; obviously, as we all know, the meaningful vote scheduled for Tuesday was postponed. Since then, events have overtaken the PM, in particular, what we’ve learned this morning, and has been confirmed by Sir Graham Brady, is that a confidence vote will be held on Theresa May later on today. It’s notable that they are trying to push this through particularly quickly.
 

The ballot

In terms of what’s going on, the ballot will be held between six and eight p.m. this evening, and a final announcement will be made at around nine o’clock, according to various media sources. Why is this confidence vote being held now? Well, as we know, a couple of weeks ago there was a previous attempt to try and oust Theresa May, certainly, the rebels in the Tory party have been questioning various parts of the Brexit deal.

 
Opposition to Theresa May has galvanised, particularly, I suppose, since you had Geoffrey Cox’s legal opinion on the backstop arrangements.
For one, they don’t like Chequers, in particular, they really dislike the backstop arrangement, and I think what we’ve seen over the last few days or so is certainly the opposition to Theresa May has galvanised, particularly, I suppose, since you had Geoffrey Cox’s legal opinion on the backstop arrangements. 
 
I think what’s a good point to go forward at this point is how does this all play out? What is the process? Because I think often it’s not known, the exact details. So, as things stand, there is to be a secret ballot, this evening, of the Tory party; effectively, Theresa May only needs a simple majority of Tory MPs, so that’s 158 plus one, in order to remain Prime Minister.
 
It’s worth noting that if she wins the ballot this evening, effectively, another leadership challenge could not be held for another 12 months, so that would give her some time, at least. I think what we’ve seen so far this morning, and actually on the news this morning, sterling has actually risen through the course of the morning, since the news hit the news wires.
 

Cabinet support

You’ve had several cabinet members come out in support of Theresa May. Obviously, the ballot tonight is secret, so it really is anyone’s guess what might happen. What we would suggest is the government is roughly formed around 120 members who we suspect are likely to back Theresa May but, as I said, it’s uncertain. We suspect you would probably need 100 or so more in order to believe that she has a comfortable support of the party.
 
If she wins it by one vote, technically she can stay, but certainly, as I said, there would be question marks over whether or not she has significant support amongst the Tory party. If she only wins by a very small majority, it’s possible she could resign but, again, that’s unknown and, given her statement this morning, she may decide to fight on but, again, somewhat uncertain.
 
If she loses tonight, or indeed she resigns, it goes to a leadership contest whereby candidates will be put forward to become Tory leader. Each candidate needs to be supported by a proposal by two MPs. That effectively is whittled down to just two, by various rounds of voting. Given they’re trying to rush this through quickly, we suspect that they will try and wind this up before Christmas.
 
Once you’re down to two candidates, that will eventually go through to a vote of the Tory membership, which may take around a month in total, on an expedited basis. But, again, we’re unsure of exactly how long that may take. If May does win, and stays, effectively she will still try and push forward with a renewed meaningful vote. The government is still sticking to the proposed deadline of the 21st of January, and there are reasons why that date is important.
 
We suspect that the possibility of extending Article 50 may be discussed at the European Council meeting on Thursday.
We suspect, if a new leader is chosen, it’s highly likely that you would have to extend the Article 50, given that if a new leader is not chosen by, say, mid-January or so, that really gives no time to really formulate a plan around Brexit. And we suspect that the possibility of extending Article 50 may be discussed at the European Council meeting on Thursday. 
 
So a leadership challenge very much remains an open question, and certainly a point of uncertainty. Just to note, I suppose, in terms of who’s favourite for next Tory leader, Raab, Boris, and Savid Javid are all in amongst the top three in terms of the betting odds.
 
I suppose just stepping back from the leadership contest, obviously, Brexit is still the main point of concern and uncertainty going forward. Now, we, as a desk, had some quick discussions around the possibilities going forward; I think the one point to note here is that the Tory party is still very divided, and the underlying issues around passing any kind of Brexit deal still remain prevalent. 
 

Potential scenarios

We discussed, I suppose, a couple of potential scenarios looking forward, but one point I would make is that I think given the rising uncertainty and the political backdrop, indeed the political chaos, we would suggest that the possible range of outcomes is rising, and you are really faced with a myriad of different possibilities. And we’re getting to the point where we really wouldn’t rule anything out, although our central view is still that some kind of agreement will be reached at some point.
 
Now, in terms of possible routes, we discussed four possibilities this morning; effectively, if May was to stay, we still don’t think that there would be sufficient support amongst the Tory party to approve and pass the Brexit deal as it currently stands on the table, which possibly feeds through into some kind of cross-party motion coming into play at some point.
 
There has been a lot of talk recently, around a Norway + type of arrangement, but certainly, if you take note of any recent reports, support for that amongst MPs appears to have lessened in recent days. If you do get a new leader, certainly we suspect it’s likely to come from the right of the party and they may try and push for some kind of free trade arrangement, some type of Canada plus plus plus arrangement, but, again, I think there are issues around that.
 

Northern Ireland border

Particularly, you would have question marks over Northern Ireland and the border. There is the possibility that you get a managed no deal, although we suspect the likelihood of this is still relatively low, given that there still remains a majority in parliament to avoid a no deal scenario. And, lastly, I suppose, there is the possibility that there is a second referendum, although certainly, we would have our own questions regarding that, on several points.
 
And certainly it would be political dynamite, but, as I said, I don’t think we would rule anything out at this point. So, really, lots of question marks on the way forward. As I said just a second ago, our central view still is that an agreement will be reached at some point.
 
We judge probably the most likely route is the possibility of a cross-party motion, where we do suspect there is a majority in the Commons for some arguably softer type of agreement. As I said, possibly a Norway-style or Norway Plus-style arrangement which could effectively command a majority in the House and pass, and effectively confirm our leaving on the 29th March.
 
Again, a lot of uncertainty.  I suppose for those clients with FX exposures, the big question over the near-term horizon is where sterling goes. I think the bottom line is that you’re going to see significant amounts of volatility. Our central view, based on an assumption that you do get an agreement is that, over the medium-term, over the course of the next 12 to 18 months, sterling rises. And that is our central view, but certainly, the risks are rising on all fronts.