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Flawed parallels with the financial crisis won’t save Theresa May’s Brexit plan.
Back in 2008, panicked investors helped the United States government force its bank bailout, the Troubled Asset Relief Program, through Congress at a second vote. The British prime minister might hope for a similar response if the British Parliament rejects her deal to leave the European Union. But a replay is unlikely.
Talk of a so-called “TARP scenario” has picked up since Mrs. May unveiled her unpopular deal to leave the European Union. The United States government proposed the Troubled Asset Relief Program to prop up the financial system in September 2008. After the House of Representatives rejected it, the American stock market plunged 7 percent. Congress promptly changed tack.
The same logic might apply to British members of parliament if they vote down Mrs. May’s deal next month. The theory is that the British pound and equities would slide as investors priced in the likelihood of Britain leaving the European Union without a deal in March 2019. Reluctant to be blamed, rebels would fall into line.
The theory has several flaws.
A cliff-edge Brexit would hardly be a surprise; it has been possible since Britain voted to leave the European Union in June 2016. The reaction may also not force a rethink. Analysts think the pound might drop by about 15 percent against the dollar — to around $1.10 — in a no-deal scenario. But the 14 percent slide in the currency since the referendum has not changed the political climate. With large British companies generating most of their earnings overseas, a lower pound would perversely prop up their shares, as in June 2016.
A market sell-off also depends on investors believing a cliff-edge Brexit is unavoidable. But if money managers think a second vote will produce a different outcome, they won’t rush for the exits as required.
The biggest hole in the TARP analogy, however, is that Britain’s crisis is entirely self-inflicted. In 2008, Congress faced a binary choice between a government bailout or deep recession. If Mrs. May’s plan fails to win support, the British Parliament could call another referendum that might cancel Brexit. Indeed, Mrs. May has warned anti-Europeans that this could happen if they vote against her deal.
For investors, that outcome would produce the opposite of panic.