September 2, 2019 10:29 am

No deal Brexit: Difficult times for the retail and credit markets

It would be a big surprise if Boris Johnson and the EU could still agree on a formal exit for Great Britain. Meanwhile, companies in the UK are increasingly getting into difficulties. But Brexit is also already having unpleasant consequences for the credit market and German banks.

Like a bull in a China Shop: This is a good way to describe Boris Jonson’s political style. The Prime Minister wants to demonstrate his strength to the EU in particular. He will force the Brexit with all his might – even without a deal. That’s what he’s committed to, the consequences of which have been of little or no concern to him so far. Should Great Britain leave the European Union on 31 October without an agreement, it is already clear who the prime minister is blaming: the EU itself – and his predecessor Theresa May, of course.

It is also clear that a no deal Brexit will have far-reaching consequences: for Great Britain and for the whole of Europe. The English economy is already weakening. Gross domestic product fell in the second quarter of 2019 compared with the previous quarter – for the first time since 2012. A clear warning signal that something is going wrong in the UK at the moment.

Companies become “zombies”

KPMG has calculated that just under 15 percent of British companies are currently experiencing financial difficulties. According to the auditing company, one in ten companies is already showing “zombie-like symptoms“. Zombies are generally defined as companies that do not make a profit and can only survive on the basis of cheap refinancing. If the economy turns in the direction of a recession, they can no longer be saved.

The changed consumer habits of the British are probably one reason for the weakening economy on the island. The Brexit is unsettling people, who now prefer to save their money rather than spend it. Increased living costs also play an important role. For many retailers this has fatal consequences: They cannot pay their rents and have to close their shops. The crisis in the retail market is taking on truly alarming characteristics at the moment.

Last year, around 2,500 shops closed down in the top 500 “UK High Streets” alone – around 40 percent more than in 2017. Shopping malls are also affected. Large owners of shopping centres such as Hammerson or Intu are increasingly not able to rent out their commercial space. According to the British Retail Consortium, a total of 85,000 retail jobs were cut between February 2018 and February 2019.

Admittedly, it would be wrong to attribute the development just described solely to the discussions surrounding Brexit. British retailers have also been struggling with the increasing “Amazonisation” of their business since the turn of the millennium. In addition, there are rising wage costs and property prices. But the weak pound is also not beneficial for companies, which in turn is a direct consequence of the looming Brexit.

British credit market as uncertainty factor

Brexit is also increasingly becoming a cost driver for banks – with or without a deal. On the one hand, the ECB’s banking supervision will become around one-fifth more expensive for financial institutions in Europe as a result of the UK’s withdrawal – due to the higher administrative and personnel costs on the part of the ECB.

On the other hand, the British credit market is increasingly proving to be a factor of uncertainty. Because defaults are now on the increase. Even large companies are increasingly experiencing refinancing difficulties. Lending by banks is shrinking, which is curbing investment, and so on. A vicious circle.

The German banks, which have traditionally invested heavily in Great Britain, have also been reducing their lending to companies from the island for years: since the Brexit vote it has fallen by more than 40 percent. This weakens the British economy further, but also deprives the German banks of a source of income they had previously believed to be certain.

In the past, German banks were particularly keen to co-finance commercial real estate in Great Britain. The investments of three of the five largest German mortgage banks in British commercial real estate still amount to a total of almost ten billion euros. However, Moody’s believes that it is commercial real estate that will be hit hardest by a Brexit without an exit agreement. Like riding the razor’s edge for German financial institutions.

But either way – it will come to a no deal Brexit, even if the effects of such a scenario would be fatal for all involved. Or do you seriously believe that Boris Johnson is deviating from his core demands and is willing to compromise? London will then lose its status as the centre of the European financial world – and the impact will be felt across Europe. Also in the balance sheets of German banks.

This post was written by Timur Peters

Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.


(Image rights: Barnes)

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