Betting on the Brexit17. June 2013 by Herman Brodie
There is no doubt David Cameron dodged a bullet last month when the House of Commons was called to vote on the referendum on Britain’s membership of the European Union. The vote only concerned a belated expression of regret that a bill to make a referendum possible had not been included on the current parliamentary timetable. Yet, although he professed to be ‘profoundly relaxed’ over the vote, Cameron must be able to see himself being painted into a corner by Eurosceptics in his own Conservative Party. These days, MPs think nothing of revealing their intention to vote for a ‘Brexit’ if a referendum should ever be held. The anti-EU UK Independence Party is snapping at the Tories electoral heels. And even Nigel Lawson, a Tory peer and former chancellor, has publicly called for the UK to exit the EU. So one surely has to expect a renewed attempt by eurosceptic backbenchers to rattle the prime minister in the coming weeks and months
Much attention was drawn to Barack Obama’s concern about a possible UK exit from the EU last month, but how many people noticed the rise in gilt yields relative to their major EU counterparts? For a few days while the Brexit was in the headlines, ten-year borrowing costs in the UK even climbed above the French equivalent. Bond investors were certainly not indifferent to the prospect of a referendum even if it is a distant one. Remember, bond investors around the world already have a finger poised just above the sell button just in case the long-heralded bond market crash actually starts to unfold.
Imagine a situation, say, a few weeks from now: Japanese bonds continue to sell-off, sending a shiver down the spine of bond holders around the globe; anti-EU backbench Tory MPs have come up with another scheme to force their recalcitrant leader to cede more ground on the EU referendum issue; Mervyn King is already out of the Bank of England, his deputy, Paul Tucker, is a lame duck after having submitted his resignation, and Mark Carney is not yet settled in. What better an opportunity for an aggressive hedge fund to test the robustness of demand for UK gilts by selling short a huge quantity of them?
A price slide would confirm for bond investors that the much-feared trend reversal had finally begun. It would be too late to silence the anti-EU backbenchers, and any hurried response by the Bank of England would seem like a panic move, perhaps even worsening the situation. It has been 20 years since George Soros made a billion dollars in a single day at the Bank of England’s expense. Perhaps the wily speculator might sense that Nigel Lawson has set the stage for yet another profitable opportunity.