Carney Reveals Europe's Potential Achilles Heel in Brexit Talks

Tyler Durden's picture

This morning, BoE Governor Mark Carney discussed the risks of a hard Brexit during his testimony to the UK Parliamentary Treasury Committee. There was renewed weakness in Sterling during his testimony.

Ironically, given the fall in Sterling, Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. We wonder whether Juncker and Barnier appreciate the threat that a “no-deal” Brexit poses for the EU’s already fragile financial system?

When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts, he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe. Moving on to the possibility that there might not be a transition period, Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

Maybe it’s Europe, not the UK, that needs the transition period most.

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.”

Returning to the theme of financial stability, he stated “As a general thing, in an uncooperative outcome, at least initially, the UK will be long financial services. We will have more capacity, capital, individuals, collateral in the UK. The EU will be short of financial services because not all of that capacity will be able to go across. The entire economic impacts are greater for the UK but, from a financial stability perspective, they are greater for the EU.”

On further questioning, Carney outlined the other two major issues, along with derivatives and wholesale banking, which would be affected, i.e. cross-border provision of insurance (UK domiciled entities would be unable to pay out) and data protection and transfer (there is more data in the UK which is relevant to the EU than vice versa).

Summing up, Carney stated “These issues are bigger for Europe than they are for us, but they’re material for us.” That comment prompted the following question “In which case we have much more leverage in order to get a deal?” The diplomatic reply was “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.” Didn’t he just describe Juncker’s modus operandi.

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JPMorgan's picture

Tick, tick, tick...

Dame Ednas Possum's picture

'Yes to Europe, no to EU. 

Yes to peace, no to NATO' 

Graffiti under a railway bridge crossing the Vltava River  in Prague.


HenryKissingerZuckerberg's picture

are (EU+UK) derivatives valid after a hard Brexit?

I want Ghordius to answer this one.

Ghordius's picture

I'm the wrong man for that. I want most derivatives to be banned... again. search ZH, I have posted over 5 years something like hundreds of long, detailed comments on that. betting... isn't finance, does not belong in banking, but at most in casinos

old naughty's picture

Hey G, no worries...

leave it to Carney, that's why he was hired/appointed.

Carney irrelevant? Who said that?

CuttingEdge's picture

Ban derivitives?

Is that before or after DB exit their downright scary derivitive portfolio, Ghordius?

Or is that a bit close to home, bearing in mind your EU couldn't survive a DB collapse?

Not a fan of them myself, but odd for you to be tangentially so vehement.

Ghordius's picture

you do know how to search the 'nets, don't you? then do it

my hate for most derivatives goes back to 1999, my comments here started way before DB was "in trouble" with it's portfolio

when, after 70 years of being banned, they were idiotically introduced again because a megabanker asked for it

the same megabanker that later stated that it was a mistake

derivatives, in a nutshell, circumvent what used to be a moral safeguard in finance/insurance:

that I can't profit from your house burning down, so I can't place a bet on your house burning down

it has to be my house, not yours

a different wording for that: "skin in the game"

CuttingEdge's picture

"it has to be my house, not yours"

You are it's most vocal supporter, Ghordius.

You are quite content with your EU. Obviously it has benefitted you, personally, given the glowing terms with which you address it. My take is a bit different, because I detest waste and corruption (which the EC is the embodiment of), and I also believe sovereignty (and the will of a national people) should be sacrosanct.

Every citizen of Europe in all 28 member states has to fund the largess of their own country's trough snufflers in government and civil service. Unavoidable, and has always been the way since tax was invented. All the EU does is double that load on the tax-payers by adding another 47000 gravy train artists at the European Commission to the bill. Just, think 10 000 European Union officials earn more than the leader of a so-called sovereign nation within the club. Doesn't that sound just a little bit odd? And even were it not, the list of truly pathetic failed politicians who couldn't cut the mustard in their own countries (because they were fucking useless) but ended up at the top of the tree as Commissioners on a mega salary and pension? Comprehensive and very disturbing.

It's a lovely club to be in, and you can see why they are screaming blue murder about a divorce bill. How else can they fund the gut-wrenching largesse that everything about Brussels represents?


Ghordius's picture

"I detest waste and corruption"

I'm fine with that, and applaud the sentiment which I share

"share" is the key word, here. 2'000 new British bureaucrats... just for the "Department for Exiting the EU"

is that waste or not?

30+ EU agencies which the fully sovereign UK shared with other 27 fully sovereign countries

if "full sovereingty" means at the end that there will be 30+, or even only 10 new UK-only agencies to do that...

... how do you reconcile your quest for "full" sovereignty with your quest against waste?

yes, we have a shared bunch of bureaucrats in Brussels and elsewhere. in the tens of thousands

compare that with the national bunches of bureaucrats in each country. they are millions

and the net result of Brexit, the fuller, the more, will be more British bureaucrats

the most expensive of them all are the experts... for trade deals. ding, ding, ding!

EddieLomax's picture

WRONG, its 420 employed at the department for exiting the EU.  

The majority of these people have been moved from other departments, so some departments in the civil service appear to be running temporarily short staffed (I know someone who is managing two teams for example).  It would be common sense for this new department to not be around forever, likely will be wound up by at most a decade.


And I can also tell you another fact, they're not earning a fraction of the salaries that the 47,000 bureaucrats do in Brussels.

Ghordius's picture

right you are. there are 2'000 planned, not hired yet

+1 for the correction


UK 'needs more bureaucrats for Brexit', says ex-diplomat - BBC News

It's now clear that Brexit means bigger government - New Statesman

Hiring Brexit experts will 'cost billions' | News | The Times & The ...

Brexit will be 'largest legal, legislative and bureaucratic project in ...

Huge number of border guards must be hired by March to avoid ...

... the question is still there. what is better? a shared bureaucrat, shared among 28, or one each?

the bitter-for-some truth about the EU is that we shared some ugly things like costly bureaucrats

the bitter-for-some truth about the EU is that all that "trade stuff" is... in the words of British ministers "complicated, more then expected"

and the most expensive ones are exactly those: the "trade stuff" experts. the US and China have excellent ones. but Australia's and New Zealand's are top notch, too, like Canada's

hey, it's a choice. as all choices, it has pros... and cons

HenryKissingerZuckerberg's picture

I'm the wrong man for that. I want most derivatives to be banned... isn't finance, does not belong in banking, but at most in casinos

I was expecting something longer but thanks, straight to the point.

Ghordius's picture

Carney's broader point is that the Continent needs London's finance center
it contradicts his previous point: "the UK needs the goodwill of... foreigners"
what happens if eurozone savings/investments don't support British deficits anymore? more... China for Britain? like Hinkley Point?

css1971's picture

Those points don't contradict for various values of "need".

fulliautomatix's picture

As I understand it, a lot of international trade is contracted under Common Law; the finance will tend to be based in a Common Law jurisdiction. If the UK really believes in it's capability as a finance centre, it knows it has to be able to sell the product. The product is contracts - written in English, with dispute protocols defined and agreed to be resolved in Common Law courts.

Pliskin's picture

'I fuck your wife, while you watch! Interested?  Call .....'

Graffiti in Bronx Park East Subway toilets.


OverTheHedge's picture

...and the telephone number? You did keep that, didn't you?

(Just asking for a friend, you understand)

Yen Cross's picture

 Carney is Irrelevent

Dame Ednas Possum's picture

Is that you Mrs. Carney? 


wisehiney's picture

Achilles has nothing to do with this.

Nor his heel.

It is carney's indubitable eunchism.

hibou-Owl's picture

I highly doubt Junk er is capable of understanding the risks, until it becomes a crisis!

Like emptying the last bottle of red wine!

krage_man's picture

Ultimately, the way EU handles Brexit at the end will reveal how EU bureaucracy is really represents interests of EU citizen

Ghordius's picture

meh. another "it is in the interest of all sides to reach a deal" point

fact: it was the UK gov's line to say "no deal is better then a bad deal" (PM May) and "they can go whistle" (FM Johnson)

now... they are getting cold feet because their "appease the backbenchers" "strategy" is being taken... seriously

and so the new approach: "they all want our money, it's all about money". double-meh.

grow up, Britain's politicians. a Dirty Brexit is not a Clean Brexit. yes, Mr. Davis, it IS complicated. no, the 27 are all behind a clean, detailed, meticulous and sequential approach. yes, any Clean Brexit will expose the lies told to the British Public. no, you can't afford a Dirty Brexit Fudge that covers them. and...

... you, in both parties, have still no course for a post-Brexit future. you are still squabbling among British Leavers and British Remainers. we... can't and won't help you there. make up your minds

Rudd and Davis just contradicted themselves about "No Deal". paint me surprised

pass the popcorn, please

css1971's picture


"No plan of operations extends with certainty beyond the first encounter with the enemy's main strength" -- Helmuth von Moltke, a German no less. More pithily translated as "no plan survives contact with the enemy. The Scots have  "the best-laid plans of mice and men often go awry"... All British "planning" involves a large element of "muddle through", mitigation and contingency because of this fundamental fact of reality.

European political elite, especially Germans & French for some reason don't seem to have learned this lesson in complexity and the subsequent need for flexibility. I personally blame Hegel.

Ghordius's picture

you mention... Scots. what is their First Minister saying about all this?
"All British "planning" involves a large element of "muddle through"..."
true. and... I do not think "muddle through" can really help them, this time.
it did not in Singapore. the Japanese general listed to the waffle and eventually stood up and gave a binary choice with a 1 minute deadline

"muddle through" and deadlines don't mix well, do they? soon they'll ask loudly for time. the Lion asked for the door to open. now it behaves like all cats: it blocks the door and twitches it's tail. Schroedinger's Lion?

Money_for_Nothing's picture

It took meticulous Brit planning to lose Singapore. It was so bad they almost didn't give Lord-whats-his-name a medal for losing. They revenge killed the Japanese General for being a capable military leader.

GreatUncle's picture

You are right to get popcorn, you might want to invest in a popcorn factory because this is long popcorn.

Ghordius the British politicians cannot hide all they have done, sold out the population, both sides BREMAIN and BREXIT only needed the BREMAIN vote to seal the deal ... all packaged up to be ruled from another country.

BREMAIN in that they were told it was so good in the EU and yet we see Greece, Spain and a whole lot of other stuff that is dreadful.

BEXIT in that we were promised it was so good for decades and it never happened for a large swathe of the population.

What you did get to see since 1972 was the British government get to kick the the can on everything by having a perfect alibi in the EU with a lot of false promises based upon it.

Pandoras box well and truly open ... I can say quite categorically whatever government is formed in Britain it will never represent me in anything and by unbinding itself from me NOT MY FUCKING GOVERNMENT NO MORE. Lieing, cheatign, thieving assholes is all that remains in my parliament.




EddieLomax's picture

No idea what your "clean" brexit is.  I suspect it is some sort of deal where the UK pays a considerable sum of money and signs up to all the same obligations it had as a member, in other words a deal that is no different to membership and is exactly what the British people opposed.

Today there are clear advantages to European nations to trade on continued terms with the UK, the only barrier to this is it would undermine the very point of having the EU, which is why the EU will oppose it.

So the result would be a return to WTO rules, anything else will likely be unacceptable to Brussels.  Later on we will hear about how 100's of thousands of auto workers across Europe lost their jobs because the 12% WTO tariff made their exports to the UK uncompetitive against US and Asian importers, that's also clean and easy to understand.  Their politicians will blame Brussels and Brussels will blame the UK, its as obvious to see this coming as night follows day.

Ghordius's picture

you: "No idea what your "clean" brexit is"

me:"a Dirty Brexit is not a Clean Brexit. yes, Mr. Davis, it IS complicated. no, the 27 are all behind a clean, detailed, meticulous and sequential approach. yes, any Clean Brexit will expose the lies told to the British Public. no, you can't afford a Dirty Brexit Fudge that covers them. and..."

recap, for you

Clean Brexit: detailed, meticulos, sequential. exposes all lies. no Fudge that covers them

but you seem to need to skip all such, and pass immediately to the blame game


Peter Pan's picture

A germexit would do more for Europe than any exit.

TheSilentMajority's picture

Shame on the UK for hiring an incompetent foreigner to head their central bank.

Shame on you!!!!!

BigJim's picture

Incompetent??? Carney kept interests rates too low in Canada for YEARS.

The man's a genius, I tell you.

GreatUncle's picture

How is the Canadian housing market bubble coming along now?

Plant the seed, water the seed, one day my son you will have a money tree.

hooligan2009's picture

ex-Chancellor Osbourne and PM Cameron also paid him 60% more in salary than his English predecessor, Mervyn King.

no doubt inflation proofed as well, so it is in his interest to keep inflation high.



WTFUD's picture

You got's to pay for quality! sarc

quasi_verbatim's picture

'We are prepared as we should be for the possibility of a hard exit...'


EddieLomax's picture

Lets put this in perspective, a "hard brexit" would mean adding tariffs to products exported to Europe adding around ~10% on average.

The Pound devalued by more than this since the brexit vote, in other words nothing changes except £18 billion pounds does not leave the country each and every year, that increases the value of the pound longterm.

hooligan2009's picture

EU financial institutions benefit from London's system of contract law within banking and insuance. there is also the benefit of less corrupt investment management, especially compared to the "back-running" done by euroepan UCITS funds. it is not that the UK fund management industry is "excellent", rather that the price gouging at close prices done by european (especially france) is rife.

i am surprised that Carney did not get ased about whether he will ensure that UK insitutions are compliant with MiFID III .

now, wtf does this mean?

"I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens."

stating this in plain english

"I want financial stability (duh!) to be addressed in a bloody autocratic way against the will of all citizens".

must be tough to fail at the only measurable target you are given (2% CPI, instead of the 3% being "enjoyed" by the bottom 70% of people BECAUSE of cutting interest rates at a time of currency weakness.

interest how the price of fish went up 10% in yesterdays UK CPI numbers - i doubt that fewer fish were caught - but perhaps these fish, priced in euro, are still not allowed to be caught by british fishermen. maybe they should get their plans for putting currently mothballed (fishballed?) trawlers in the UK's fishing waters and showing the finger to the dutch and spanish trawlers currently fishing brtish waters (and charging in euros.

Ghordius's picture

you had me... at the "Fish & Chips" line

help me, I forgot how much fishing contributes to the UK's GDP

was it 1% or was it 0.1% ?

hooligan2009's picture

well now that the UK fishing industry has been run down (in favour of other EU countries) the impact is not on "what is the current state of play" but rather than "what could/should be the state of play, post Brexit".

from here, back in 2006:

The removal of both the fish catching and fish processing sectors in the UK would have the following effects
on the UK economy:
• UK Employment would decrease by 137,601 FTE jobs;
• UK GDP would decrease by £4,342.2 million (0.48% of UK GDP).

here it is 0.4%

froman anti_EU advocate here in 2015:

"After its introduction in 1970, the CFP has been synonymous with the huge decline of our fish stocks, deterioration of the environment, wasteful discarding of fish, and the destruction of Britain’s fishing industry and communities."

Greenland left the EEC in 1984 because of fishing to quote again "In the Seventies, Britain and Greenland held around 80 percent of fish stocks. In comparison, nations such as France, Spain and Italy had destroyed stocks in the Mediterranean".

back in 2000, the BBC put this out

Fifty years ago Britain's fishing industry employed around 50,000 fishermen. Today there are around 17,000.

Just eight years ago, the UK exported nearly 229,000 tonnes of fish a year. In 1999, that figure had more than halved.

it is as much about emplyment as it is about economic growth. maybe the UK's waters cannot support 50,000 and "cod wars" with iceland are set to recommence. point is, uk's fishermen have been replaced by, mainly, the same number of spanish and dutch fishermen, fishing in british waters - they will soon be booted (soled?) out.

OverTheHedge's picture

I would expect that the fishing will be used as a bargaining chip - not enough in the fishing industry to affect votes. Same with agriculture. The UK tends to bargain away ag & fish to gain elsewhere (City of London) - I don't expect it to change.

The only thing that might help all this is the expectation of UK voters that leaving the EU actually means leaving the EU. If Ghordius gets his way and all the UK loses is its right to control the direction of the EU, but all the rules and silliness remain, then I see insurrection and mayhem in the offing.

hooligan2009's picture

there is still way too much "anchoring" by the UK government on the UK being part of the EU.

the UK has been positioned to be part of the EU for ore than 40 years. politicians and governments have had this "mind set". rubber stamping EU directives from the EU COmmission into british law.

the UK is soon to be out of the EU unless inertia and incpmpetence delays the exit (parliamentarian and "their lordships" notwithstanding - politicians are pro-EU because it hides their own incompetence and unwillingness to put british interests ahead of others).

the city of london is a city of foreign (at least 80% non-UK) interests whose "elitist" employees enjoy low taxes, a high standard of living. the city of london is not british or english - it is european, american, japanese, canadian, australian, indian, chinese, middle eastern etc - these elites are similarly supported by foreign ancillary services - half "british" at most.

the point is, not enough work is being done on taking the EU out of the british economy. not enough on and positive or negative impacts from taking up the slack by brits and filling gaps from outside the EU (e.g. commonwealth doctors or american technology or chinese investment, etc etc.).

the government is, in the vernacular, "a possum in the headlights", rather than the behaving like the three lions.

Ghordius's picture

"rubber stamping EU directives from the EU COmmission into british law"

nah, there was more activity in the UK then just passively "rubber stamping"

look up the term: British Gold-Plating

there is even a wiki article for that:

Ghordius's picture

so? the myth continues, the goldplated stuff is still there. the lies persist

Ghordius's picture

"The only thing that might help all this is the expectation of UK voters that leaving the EU actually means leaving the EU."

and... who can change those expectations?

"If Ghordius gets his way and all the UK loses is its right to control the direction of the EU, but all the rules and silliness remain, then I see insurrection and mayhem in the offing."

my way? all those "rules and silliness"... the existing ones are in process of being incorporated in British Law, with the "Great Repeal Bill". a completely British idea, mind

meanwhile, I doubt you could come up with even one of them that isn't a joke or a myth, or both. from "bent bananas" to "save our jugs"

look, it's simple: you Britons... have to make up your mind what you want

if you leave the club completely, why should you have a say or "the right to control" the direction of our club, of our market, of our customs union?

EddieLomax's picture

We can look to the Falklands to see how fishing is likely to work.  Initially it will be regulated with fees paid for the rights to fish, the Falklands are a tiny set of islands yet the fishing rights are worth around 200m.  The north sea rights are considerably larger, once the areas have been rested enough they should contribute billions to the country, note that these billions are high value since the majority of the value is created in the UK rather than imported.

In comparison a Honda factory imports all its parts from Japan and assembles the final product in the UK, both might say be a £5 billion export industry for example, but one requires £4.9 billion of imports while the other requires £0.1 billion of imports (numbers totally made up, but I hope you get the point).  

So while the fishing industry seems small it generates a lot more real prosperity.

And the UK has no power to direct the UK, in the past 5 years we've had 40 or so votes and been outvoted 40 times (every time!  we are 1 out of 28 votes, meaningless in other words).

fiddy pence haff pound's picture

"fishing a .... chip"?

You must be British.

Redneck Makin-tosh's picture

You had me at the fear of using financial stability as leverage.

I wondered about that too, heaven forbid the serfs discover we fly by the seat of our pants.

WTFUD's picture

Derivatives, OUCH! Who knows what lurks out there yonder, in the deep? They'll be digging the Bodies up for years in this messy D.I.V.O.R.C.E. - Billy Connolly

She stuck her teeth in-tae my B.U.M. and called me an effing 'C'

I'm telling you that was my cue to get O.F.F. ski

And i'm going down tae the Pub tonight

To get a new B.I.R.D.