The fallout on British business from the Brexit vote last week is already starting to take shape, despite an absence of any political movement towards a clarification of the timing of the country’s departure from the EU and the single market.
On top of the downgrading of Britain’s credit rating by the three main agencies, Moody’s yesterday put Britain’s banks and big insurers on notice of a range of future cuts to their ratings, depending on what happens in the Brexit negotiations with the EU.
Budget airline, EasyJet said it “remains to be seen” if the airline will remain headquartered in London after the Brexit vote. Visa could shift card processing operations to the EU to meet rules controlling credit card transactions in the EU and Toyota raised the prospect of moving some of its operations to the EU (as it warned before the vote last week) once the relationship between Britain and the EU is clarified.
As well, Sir Richard Branson said Virgin Money had abandoned a major takeover deal with an unknown company in the wake of the Brexit vote and mobile phone giant, Vodafone placed Britain on notice that it could move its global HQ out of the country because of Brexit.
At the same time the 20 billion euro takeover of the London Stock Exchange by the Deutsche Borse of Germany is looking increasingly shaky because of the Brexit vote. It was already a marginal deal before last week’s referendum, now major German regulators are questioning the deal and its requirement for the merged company’s HQ to be based in London.
The first business related move was revealed at the weekend when the new European banking regulator which had been based in London, confirmed it would be moving to the EU because of Brexit, watering down British influence on banking rules.
On Tuesday French President François Hollande fired a major salvo at British financial interests, led by the banks, fund managers and insurers, by telling the City of London that would no longer be able to clear (process) euro-denominated trades.
Speaking at the end of the EU summit in Brussels (which was the last to be attended by British PM, David Cameron) Mr Hollande warned that it would be unacceptable for clearing — a crucial stage in trading of derivatives and equities — to take place in the UK.
“The City, which thanks to the EU was able to handle clearing operations for the eurozone, will not be able to do them,” he said. “It can serve as an example for those who seek the end of Europe . . . It can serve as a lesson,” The Financial Times reported the French President as saying.
The FT pointed out that the French government has been doing everything it could to block clearing in the UK and forcing it to take place in the EU. Now those demands have been made easier to meet by the Brexit vote, and there is nothing the Brexiters in Britain can do to stop it.
In Germany, the country’s main financial regulator cast doubt on the huge stock exchange merger, warning that it will not go down well in the country if the HQ is based in London and outside the EU.
Under the terms of the deal in March, the combined group was to have its main headquarters in London. But the Brexit vote has seen the rapid escalation of opposition to the deal from German politicians for the headquarters to be located in Frankfurt.
The FT reported that Felix Hufeld, the president of BaFin, German’s key financial regulator, saying in Frankfurt that it was “hard to imagine that the most important exchange venue in the eurozone would be steered from a location outside the EU”. BaFin does not have the power to block the merger, but it is highly influential.
The final decision in Germany will be taken by the economics ministry in the state of Hesse, where Frankfurt is located and where senior officials have also voiced opposition to the deal in its current form.
Part of the problem for the merger that with key votes by shareholders in both companies due next month, the deal cannot be altered in any way after being set in March.
The two exchanges can proceed with the merger and face the consequences if it is blocked in Germany, or they can abandon the proposal and try later this year. But by then the Brexit split will be more apparent and the merger all but impossible to transact.
Separately Vodafone indicated that it might consider moving its headquarters out of the UK given uncertainty caused by the Brexit vote about how many of the “positive attributes” of being in the EU will be left once Britain has exited.
The teleco started in the UK 30 or so years ago, but is now global company with bigger operations on mainland Europe than in Britain. But it said in this week’s statement it was not possible “to draw any firm conclusions regarding the long-term location for the headquarters of the group” after Brexit.
Vodafone said that it would “continue to evaluate the situation and will take whatever decisions are appropriate in the interests of our customers, shareholders and employees”.
It said its European businesses, excluding the UK, account for 55%, of earnings,while the UK only accounts for 11%.Vodafone said the UK’s membership of the EU had been an important factor in the growth of the company, stressing that freedom of movement of people, capital and goods was “integral to the operation of any pan-European business, as are single legal frameworks spanning all member states”.
“It remains unclear at this point how many of those positive attributes will remain in place once the process of the UK’s exit from the EU has been completed. It is, therefore, not yet possible to draw any firm conclusions regarding the long-term location for the headquarters of the group,” the company said yesterday.
In the wake of Moody’s putting the UK’s credit rating on a negative outlook, the firm had changed its outlook for the banking sector from stable to negative.
Moody’s also adopted a more pessimistic view on Britain’s main life insurers, including Standard Life and Legal & General, and several infrastructure and project finance issuers.
“We expect lower economic growth and heightened uncertainty over the UK’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions for UK financial institutions,” Laurie Mayers, associate managing director at Moody’s, said in a statement.
“Moody’s believes that there will be little short-term liquidity implications for UK banks given the extensive contingency planning preparations by the Bank of England, regulator and the banks themselves,” she said.
It added that the UK’s need to negotiate a new agreement to allow financial services firms to “passport” into the rest of the EU with little extra regulatory requirements “could lead to additional costs for banks if the final agreements fail to replicate current conditions”.
And Sir Richard Branson’ said Virgin Group has called off a deal to buy a UK company employing 3,000 staff, as he warned of the impact on jobs and investment of Brexit, Virgin Group said Sir Richard was “deeply concerned about the impact leaving the EU is having and will continue to have on markets and businesses, including Virgin”.
The company confirmed that it had called off a deal to buy a UK company, which it did not name, as a result of the referendum outcome.
