The mantra within the British government as it prepares tohammer out the terms of its break-up with the European Union isthat no deal is better than a bad deal.

Walking away with no regime for 230 billion pounds ($287billion) of annual exports to the bloc and the 3.3 millionEuropeans in the U.K would be “perfectly OK,” says ForeignSecretary Boris Johnson. Not “frightening” at all, says Brexit czarDavid Davis.

But analysts are painting an entirely different picture of anoutcome they view as increasingly plausible: U.K. Prime MinisterTheresa May balking at the EU's demands or giving up on getting thesweeping trade accord she wants. And a collapse in the two-yeartalks, which May is set to trigger next week, would unleash costsand regulations that stand to damage Britain far more than theEU.

“A deal will take a lot more time, goodwill and tact than hasbeen on display from either side,” said Anand Menon, director ofThe U.K. in a Changing Europe research group, who sees a 50% chanceof there being no deal on March 29, 2019. “I find it very hard tosee how May gets all she wants.”

An official in May's government puts the chance of the talkcollapsing at about 30%. EU negotiator Michel Barnier this weeksaid the bloc should ready to deal with the “serious consequences”of a breakdown, such as longer queues at borders to how to handletransportation of nuclear materials.

If May does walk away, then the U.K. would truly be in unchartedterritory. Based on interviews and published analysis, here's arough map of what might happen should Britain spin out of the EUwithout a safety net.

Even before May delivers an emergency statement to the House ofCommons to explain the failure, financial markets would havealready priced in the ramifications.

Jordan Rochester, a London-based strategist at NomuraInternational Plc, predicts the pound would slump towards $1.15,extending its post-referendum slump to almost a quarter. The day in2013 when David Cameron announced his intention to call areferendum sterling was at $1.58.

Companies, meantime, would activate plans for the tumble overwhat they've long described as a “cliff edge” of uncertainty.Absent a deal, the U.K. would surrender tariff-free orfriction-less trade with the EU's 440 million consumers and anyhope of a transitional phase to adjust.

For manufacturers, World Trade Organization tariffs averagingabout 5% — and twice that for cars produced by the likes of FordMotor Co. — would be immediately imposed on trade with the EU, themarket for 44% of Britain's overseas sales. Farmers could faceduties of around 40% and most industries would suffer higher importcosts if Britain imposed its own tariffs on trade from the EU.

That would reduce trade by about 30%, according to the NationalInstitute of Economic and Social Research. Oxford Economics Ltd.estimates that by 2030, gross domestic product would be 3.9%smaller, or 96 billion pounds in inflation-adjusted terms.

At ports, border checks would impede commerce further; the likesof BAE Systems to J Sainsbury might struggle to get timely deliveryfrom the continent to keep assembly lines humming and supermarketshelves stacked.

Then there's the City of London — a global hub of finance andthe gateway for capital to and from Europe.

JPMorgan Chase & Co. and other banks that had hoped to keepservicing the bloc from London would likely accelerate the shift ofjobs and operations into the EU or to New York. The consulting firmOliver Wyman estimated that in a worst-case scenario, 70,000financial-services jobs would be lost.

'Day One'

“On day one, JPMorgan has to be able to conduct business withour clients in Europe,” Chief Executive Officer Jamie Dimon toldBloomberg this month.

The French or Germans would, without delay, repatriate controlof the clearing of euro derivatives, and credit-rating companieswith bases in London would lose their authority to policecontinental companies. Xavier Rolet, CEO of London Stock ExchangeGroup, has said 232,000 jobs could eventually be lost from theU.K.

No deal would also further punish industries likely to behamstrung by Brexit. Airlines such as EasyJet might see theiraccess to the continent cut off unless they relocate headquartersor sell more shares to investors in the region to satisfyregulators. The hospitality and agriculture sectors already face astruggle to get the workers they need as do pharmaceutical firmslike AstraZeneca, which would also have to deal with the loss ofthe European Medicines Agency from London.

The hardest of Brexits would also risk the imposition of a hardborder between Northern Ireland and the Republic and emboldenScottish First Minister Nicola Sturgeon's push for a secondindependence referendum. This week's terrorist attack on Londonalso underscored the importance of continental securityrelationships, which could be jeopardized.

For May, the threat to walk away is a basic negotiating tacticif the U.K. is to avoid being punished by the EU. “No deal forBritain is better than a bad deal for Britain,” she said inJanuary, adding it would be an “act of calamitous self harm” forEurope to try to retaliate against the nation for its desire toleave.

May's bullishness reflects the bet that Britain's Blitz spiritwould carry it through. She herself has held out the prospect ofslashing corporate taxes to lure businesses and investment.Released of the EU's constraints, the U.K would also count onfree-trade deals from China to the U.S.

If the talks do blow up, the most likely detonator is the demandthat Britain must pay to leave. The EU's need to prevent otherbreakaway efforts requires a cost be imposed on Britain — asettling of accounts, in the view from Brussels.

“We have to calculate scientifically what the Britishcommitments were and then the bill has to be paid,” EuropeanCommission President Jean-Claude Juncker told the BBC Friday. Askedif the bill will be 50 billion pounds, Juncker replied: “It'saround that.”

U.K. Trade Secretary Liam Fox has described such a fee as“absurd.” Some in government have questioned its legality; the EUcould force the issue before the International Court of Justice.Brexit campaigners back home would also balk at paying toomuch.

Money Talk

While May wants to discuss divorce and a new trade deal at thesame time, EU officials say they won't even engage on commerceuntil the matter of the money is settled.

“The EU recognizes it has huge leverage and is ready to use it,”said Gregor Irwin, chief economist at Global Counsel, a consultingfirm. “There is a risk of the negotiations unraveling becauseyou're never quite sure how much it all means to the other side. Ifyou push too far and it turns out they weren't bluffing, you end upwith no deal.”

Even if a bill is paid, things don't get any easier. Whilewilling to give up membership of the single market for goods andservices to regain control of immigration and lawmaking, May wantsto win as much trade free of tariffs and bureaucracy as shecan.

That smacks of “cherry picking” to some in the region and if theEU balks, May could again walk. She will also know the risk of apoor trade deal would leave her prone to attack from theanti-Brexit lobby at home.

Talks might ultimately need to break down for progress to bemade, according to Oliver Harvey, a strategist at Deutsche Bank AG.In that event, May would call an election aimed at winning amandate to strike a deal some in her own ruling Conservative Partywon't like.

“The U.K. will eventually compromise,” said Harvey. “Butthis will depend on a weakening economy and market pressure, with afull cliff-edge Brexit likely to be fully priced in at some pointin the next two years.”

Bloomberg News

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