Get it done

Johnson will give his first speech to the House of Commons as Prime Minister on Thursday, and he’s widely expected to repeat the mantra he used during the leadership campaign and his acceptance speech on Tuesday: get Brexit done by Oct. 31, unite a divided country and then use the momentum to win the next general election, due in 2022.

Some expect him to signal that intent Wednesday as he fills the top ranks of his cabinet: will he only nominate die-hard Brexiteers or will he—as he suggested Tuesday—reach out to the ‘Remainer’ wing of his divided party?

Whether either approach is successful may come down to the $37 billion question of whether Johnson’s threats of ‘No Deal’ are credible. Despite his stated aim of unifying the party, many of his colleagues hate the idea, and four ministers have resigned or promised to resign from the cabinet in the last three days to be free to vote against it if push comes to shove. They include party stalwarts Treasury chief Philip Hammond and Justice Secretary David Gauke.

The cost of Brexit

What follows is likely to be uncomfortable, particularly for all those invested in the U.K., financially or otherwise. The International Monetary Fund reminded the world on Tuesday that a ‘No-Deal’ Brexit is one of the three biggest risks to the world economy, alongside the U.S.-China trade dispute and the threat of higher U.S. import tariffs on autos.

The Office for Budget Responsibility, an agency akin to the Congressional Budget Office, predicted last week that a ‘No-Deal’ Brexit would blow a 30 billion pound ($37 billion) hole in public finances, undoing much of the fiscal stabilization that is arguably the current government’s biggest achievement: the deficit is projected at 1.1% this year, down from 9.9% in 2009.

That has already had an impact on the pound. During his runoff for the leadership with rival Jeremy Hunt, Johnson’s embrace of the “Do or Die” Brexit scenario (his words) pushed the pound to its lowest in over two years, with sterling falling below $1.24 at one point. The spectre of ‘No Deal’ has also been partly responsible for U.K. stocks underperforming the rest of Europe this year: the benchmark FTSE 100 has risen only 12%, compared to 17% for the Eurozone’s Stoxx 50.

Deal or no deal

The EU’s chief negotiator Michel Barnier affected nonchalance on Tuesday, repeating that the bloc won’t reopen the deal that was agreed with Theresa May, but others may be easier to sway.

“If the approach of the new British prime minister is that they’re going to tear up the withdrawal agreement (negotiated by Theresa May), then I think we’re in trouble, we’re all in trouble, quite frankly,” Irish Foreign Minister Simon Coveney told the BBC over the weekend.

Ursula von der Leyen, the new European Commission President, has signalled she would be open to extending the Brexit deadline “if there was a good reason.”

Spending spree

Rupert Harrison, a portfolio manager for BlackRock in London who used to work for former U.K. Treasury chief George Osborne, thinks things will get worse for U.K. assets before they get better.

That’s because he expects Johnson to order a big increase in spending on preparations for ‘No Deal’ in order to scare the EU negotiators on the other side of the table into concessions that can be styled as a victory. Not only is ‘No Deal’ likelier under Johnson, Harrison argues, but the show of intent is seen as crucial in maximizing the U.K.’s bargaining power. 

For such reasons, Blackrock’s Harrison expects Johnson “to continue ramping up talk of No Deal” in the short term.

“I suspect markets won’t like it so (there’s) probably some further downside for Sterling,” Harrison tweeted.

A slim majority

Ultimately, Johnson is constrained by the same problem as May, in that he only has a working majority of two. Even that slim majority (which is likely to shrink to one next week at a by-election in Wales) depends on support from the Northern Irish Democratic Unionists, a party with good reason to fear No Deal: a December opinion poll by research company Lucid Talk found that 55% of people in Northern Ireland would either definitely or probably vote for a united Ireland in the event of a ‘Hard Brexit’, a result impossible without at least some support from the historically pro-British protestant majority there.

Such factors suggest the support for Johnson’s plan isn’t broad enough to let him carry out a ‘No Deal’ threat. In all likelihood, it will come to a ‘showdown’ with parliament sometime in October, says said Kallum Pickering, senior U.K. economist with Berenberg Bank in London, in a note to clients.

That showdown, he argues, could end in either a further Brexit extension, a snap election and/or a second referendum, as Johnson tries to break the gridlock in search of a clear mandate.

In other words, anything but the ‘Clean Break’ that Johnson has repeatedly promised.