A no deal Brexit: who gains?

The former Conservative Chancellor, Philip Hammond, has this weekend (Saturday 28 September) written that Boris Johnson “is backed by speculators who have bet billions on a hard Brexit – and there is only one outcome that works for them: a crash-out no-deal Brexit that sends the currency tumbling.”

Hammond’s comments follow evidence of a rise in short positions taken against sterling which, in turn, could be evidence of bets against a no-deal Brexit. A ‘short position’ is a bet on currency or stocks that the prices will go down. It involves a share being borrowed, sold immediately at market price with an agreement to repurchase later, then repurchased (at a lower price) and returned to the owner. Money is made from shorting when the price falls; when prices rise, money is lost. The film ‘The Big Short’ explains how this led to the 2008 financial crash.

What Hammond’s claims highlight is that a number of Johnson donors who back a no-deal Brexit are also associated with hedge funds involved in shorting.

The Byline Times reported on 11 September a huge spike in the number of short positions being taken ‘on a no deal Brexit’ between January and May, and July when Boris Johnson was elected leader of the Conservative Party. The Byline Times also notes that two-thirds of Boris Johnson’s donors between May and July were from hedge funds. However, although the Byline Times has have been found to have misread some data overestimating the spike in shorting, it is clear that there has been a rise in short positions taken against sterling.

In the week to August, there were approximately twice as many contracts betting against sterling as before the EU referendum in June 2016. Further, leveraged funds increased net short positions against sterling to $7.83 billion in the week to 6th August. Later in August short bets against sterling rose to their highest in more than two years.

This has been matched by the fall in the value of sterling, which, when not being manipulated, tends to reflect the health (or not) of the economy. On average in August compared with July, the pound fell by 2.5% against the dollar, following a fall of 1.7% between May and June. The pound fell sharply against the dollar following the EU referendum, from $1.48 on 23 June 2016 to $1.14 in June 2017 – a 31 year low. In 2018, the value of the pound against the dollar reached as high as $1.43 in mid-April (the highest since the EU referendum), though has fallen since, remaining between $1.20 and $1.22 since mid-August 2019.

Sterling was down 1.7% against the Euro on average in August compared to July. On 4 September 2019, the Euro was valued at €1.11 per £1. This compares with a daily all‑time low of €1.02 (on 30 December 2008), and a launch rate of €1.48 on 31 December 1998. The impact on businesses trading with the EU is already being felt, as well as with holidaymakers.

In addition, many of those involved in this shorting are friends of and donors to the Prime Minister.

This year Prime Minister Johnson and the Tories have received £726,000 from individuals, a number involved with hedge funds, who back a no deal Brexit:

The Financial Conduct Authority (FCA) requires that a short is declared to the FCA where, if a private share, the net short position is at least 0.2% of the company’s share capital – and there must be a further declaration at each 0.1% increment after that. In the case of public shares, a net short position must be declared if shares reach 0.5% of a company’s share capital, and at every 0.1% after that.

A future Labour Government would undertake a twelve-month inquiry into the finance sector, including looking at whether hedge funds and short selling are appropriately regulated. We will also introduce a range of other measures, including a review of MPs’ Conflict of Interest Code, that will ensure that MPs do not stand to gain financially, directly or indirectly, from events such as no-deal Brexit that will have disastrous consequences on our country.

Debbie Abrahams MP

 

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