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The stark admission comes ahead of “intensified” talks between both sides this week as they step up negotiations with just six months to go until the Brexit transition period expires. Boris Johnson’s refusal to request an extension has piled pressure on the teams led by David Frost and the bloc’s Brexit frontman Michel Barnier.
Analysts at many banks have laid bare their concerns about the chances of a no deal Brexit on December 31.
Sarah Hewin, chief Europe economist at Standard Chartered, told Reuters: “We think there is a 50-50 chance of a no trade-deal Brexit.”
Referring to the issue of the Northern Irish border with the Republic, she warned of huge challenges ahead in negotiations.
She added: “There are big hurdles still and no one is really talking about Northern Ireland at the moment.”
Berenberg analysts put a 60 percent chance on a deal not being reached by the end of the year.
But, they expect a transition to World Trade Organization (WTO) rules via small steps, with only a 5 percent probability of a disorderly outcome.
Commerzbank sees a 20 percent chance of the transition period being extended beyond year-end despite the Government’s insistence this will not happen.
But while assigning only a 10 percent chance of Britain leaving without an agreement in place, they think any deal will be “weak with very limited reach”.
JPMorgan too predicts a deal will be reached but only after the current deadline.
ING economist James Smith sees a 40 percent probability of a no deal Brexit – twice as likely as a year ago.
However, he sees little difference between having a free trade agreement and exiting without one.
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Mr Smith said: “In either scenario the UK is leaving the EU single market and that is where the bulk of the new costs for businesses will come from.”
Societe Generale FX strategist Kit Juckes assigns a 16.7 percent probability to a no-trade-deal outcome.
But he said he expects the UK to leave the EU with a bare-bones agreement, adding to strains on the economy.
Mr Juckes said: “If the global economy does badly and we do a bad trade deal we will do worse than most.”
The warnings from analysts come as Alliance MP for North Down, Stephen Farry, on Tuesday questioned whether appointing David Frost as National Security Adviser while he remains the UK’s chief negotiator risks a no deal Brexit.
Mr Farry said: “How does the Government plan to reconcile David Frost’s role as National Security Adviser with his role as Brexit negotiator… which he’s currently engaging in brinkmanship and indeed the risk of a no deal happening at the end of the year?”
Cabinet minister Michael Gove replied: “I should think that it is precisely because David Frost is involved in complex and serious negotiations about security and defence cooperation with our European allies that he is supremely well placed to take on the role of National Security Adviser.”
Asked by Tory MP and Foreign Affairs Select Committee chairman Tom Tugendhat whether Mr Frost would appear before his committee, Mr Gove said: “I’m sure that he would be delighted to take up that invitation.”
Mr Frost will replace Sir Mark Sedwill as the UK’s top civil servant in September.
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