Brexit: Things need to get worse before they can get better, analyst says

Both the U.K. and the European Union need to become more “frightened” about the possibility of an abrupt break-up, an analyst told CNBC on Friday.

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Both the U.K. and the European Union need to become more “frightened” about the possibility of an abrupt break-up, an analyst told CNBC on Friday.

Fears that Brexit negotiators will not manage to reach an agreement before a legal deadline are growing, with regulators, politicians and market players calling for preparations to be stepped up.

Even British Prime Minister Theresa May told parliamentarians last week that her government would be increasing its efforts to have a backup plan in case there isn’t a Brexit deal when the U.K. leaves the block next March.

Speaking to CNBC’s “Squawk Box Europe,” Giles Keating, managing director at Werthstein Institute, suggested that Brexit talks would get more dramatic, before negotiators understood the full danger of not reaching an agreement.

“I think the only way you get a Brexit deal is for both sides to get really scared about the effect of not having a deal. And that means we have to get more and more frightened and understand how bad it would be — and only then people would come to their senses,” Keating said.

Dominic Raab, the U.K.’s chief Brexit negotiator, had his first meeting in Brussels on Thursday, after replacing David Davis, who resigned earlier this month over differences with May over how best to proceed.

Media reports indicated this week that Raab would be embarking on a mission to explain to British businesses and households what leaving the EU without a deal would mean for them.

European officials have also been stepping up their preparations for a no-deal scenario. The International Monetary Fund (IMF) said Thursday that the EU could lose as much as 1.5 percent of its annual growth should no agreement be reached.

Earlier this week, Jane Foley, head of forex strategy at Rabobank, told CNBC that “a huge amount of investors are out of sterling right now,” because the negotiations and the politics on the subject are “very confusing.”

Sterling stood at about $1.30 on Friday morning, but the currency has been vulnerable to Brexit shocks.

Keating told CNBC that Brexit is “binary” in the sense that there will either be a deal close to the current relationship between the U.K. and the EU, or there won’t be a deal, a scenario that would prove very challenging for businesses.

“It’s binary and that is very, very difficult to trade,” he said.

Keating added that “sterling has to go somewhere,” so depending on the outcome of the negotiations, it will end up higher or lower, “but it has to trade down the middle for now.”

May is due Friday to speak about Brexit in Belfast, after visiting the Irish border — one of the most difficult issues facing Brexit negotiators.

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