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Debate Over Brexit Fee: Would Non-Payment Constitute Default? Who Owes Whom?

Authored by Mike Shedlock via MishTalk,

Round and round we go. After more than two years the UK and EU are still debating Brexit breakup fees.

On March 29, 2017, the UK filed Article 50, triggering an exit process from the EU, but the UK is still trapped.

Theresa May negotiated such a poor deal that the British Parliament would not accept it. Yet, there is no support for the default legal position which is a No Deal (WTO Deal) Brexit.

Theresa May did manage to get two extensions, the latest one expires October 31.

May’s is now gone and a leadership vote is in progress. Boris Johnson, the heavy favorite has pledged to not pay the Brexit breakup fee of £39 billion (about $50 billion).

France Says Not Paying Would Constitute Default

“Not honoring your payment obligations is a failure of international commitments equivalent to a sovereign debt default, whose consequences are well known,” a source close to French President Emmanuel Macron told Reuters.

Unwise to Default Says Telegraph

Telegraph writer Jeremy Warner says Britain Would be Unwise to Ruin its Perfect Record on Sovereign Debt by Defaulting on the EU Divorce Bill.

Britain is the only one time dominant power that has consistently honoured the terms of its government debt. Germany, France and China have all been serial defaulters, and even the mighty US has reneged on the terms of its debt on occasions.

What, then, to make of Boris Johnson’s comments on the EU divorce settlement? The Tory Party leadership frontrunner has threatened not to pay the agreed £39bn unless he wins a better deal, or to be more precise – the script keeps changing – he has said that he would withhold “at least half” this sum until a satisfactory free trade deal is concluded.

This would of course not be the same as defaulting on sovereign debt, but it would arguably amount to reneging on the country’s international obligations, so might reasonably be thought of as much the same thing.  It is therefore not a threat to be made lightly.

Higher Ground

Telegraph writer Ambrose Evans-Pritchard says Refusing to pay the £39bn Brexit bill is not a default, but Boris Johnson should stake out higher ground.

Who Owes Whom?

In 2017, Lawyers for Britain made the legal case We Don’t Owe the EU Any Money.

We do not owe the EU any money as a Brexit divorce bill. That is the conclusion that Martin Howe QC, Chairman of Lawyers for Britain, and Charlie Elphicke MP have come to after an exhaustive analysis (click to download full report) of the claims the EU Commission sent to the British Government in June. The Government would, therefore, be right to stand firm and not be blackmailed into a multi-billion pound divorce bill. Particularly as it transpires that the legal position is that the EU owes us €10 billion.

The EU’s main claim appears to be that the UK is obliged to contribute to the EU’s budget for a period of roughly two years after withdrawal. This claim is without merit as a matter of international law. The EU’s “Own Resources Decision” and its “Multiannual Financial Framework” are legally subordinate to the EU treaties. They have no binding force in law independently of the treaties. Therefore they cease to impose any legal obligation on the date when the Treaties themselves cease to apply to the UK – on March 29, 2019.

The EU’s second claim relates to the large deficit of its staff pension scheme. The UK could not be liable for a share of that without having a claim on a corresponding share of EU assets. Yet there is no general practice in international law of States making or receiving balancing payments representing the net assets or liabilities of an international organisation when they join or withdraw. No such balancing payments were made when Member States joined the EU. It is therefore difficult to see any credible basis upon which the UK is obliged to make any net payment when it leaves.

The European Investment Bank (EIB) is in a rather different position. Member States have paid up capital to this organisation, and that capital stands in its books. There is a compelling argument that the UK, on EU exit, is entitled to the return of its paid up capital and to a corresponding share of the accumulated reserves of the EIB. This amounts to about €10 billion.

Certainly Not Default

Regardless of who owes whom, if the UK refuses to pay, it certainly would not constitute default.

The rating agencies would not label it a default and there are no bonds or interest in play.

Macron’s position is ludicrous.

How Much?

£15.9 billion of the £39 pertains to EU budget contributions for 2019 and 2020. A portion of the liability has already depleted.

Warner cautions “Watch out for any politician who says they have negotiated the sum down.”

Also watch out for the EU suddenly agreeing to lower the bill as a matter of goodwill.

Honorable Silliness

Pritchard wants Johnson to pursue the higher ground. What a hoot.

The EU openly admitted a desire to trap the UK into a permanent customs union and Pritchard is worried about matters of honor.

Moreover, and as Theresa May proved countless times, giving int to the EU never gets a positive result.

Will the EU return the good will?

Hell no. So why bother?

Agreeing to pay £39 billion that a fool negotiated is silly. Only by making £39 negotiable can Johnson possibly get anything in return.

The UK is in this mess precisely because Theresa May is a piss poor negotiator who gave away the farm for nothing in return.

Brazen Liars

The EU is nothing but a brazen pack of liars. And Theresa May was in bed with the lot of them.

I cannot emphasize that point enough: Let’s Discuss Brexit (and How the EU Bragged, on Film, About Screwing the UK)

Please click for a shocking (if you have not seen it yet) video.

No Honor in Being a Fool

Telegraph writers Pritchard and Warner have lost their minds.

There is no honor or high road in being the EU’s fool.


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About The Author

Tyler Durden

Zero Hedge's mission is to widen the scope of financial, economic and political information available to the professional investing public, to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become, to liberate oppressed knowledge, to provide analysis uninhibited by political constraint and to facilitate information's unending quest for freedom. Visit https://www.zerohedge.com

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