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Why Goldman Sachs Thinks a Catastrophic No-Deal Brexit Is Now More Likely

Goldman Sachs thinks a no-deal Brexit is more likely following Tuesday’s votes in the U.K. Parliament, where lawmakers demanded proven impossibilities.

The bank now puts the likelihood of “no deal” at 15% rather than 10%, and reduced the likelihood of Brexit being cancelled from 40% to 35%. A no-deal Brexit would see the U.K. crash out of the EU on March 29th with sudden effect, most likely leading to significant supply chain disruptions, including food and medicine shortages.

Here’s why Goldman has shifted its odds.

Members of Parliament narrowly voted through two significant amendments to the Brexit plan: one says there should be no “no deal” Brexit, while the other demands the removal of the contentious “Irish backstop” from the withdrawal agreement struck between Prime Minister Theresa May and her European counterparts. May herself backed the latter amendment.

The backstop element of the deal aims to avoid a hard border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU) that surrounds it. The border is currently very porous, to the extent that it runs through people’s properties, and maintaining the soft border is seen as crucial to maintaining peace in the region. The current withdrawal agreement states that, if there is no U.K.-EU customs deal by the end of 2020 (when the Brexit transitional period ends,) then Northern Ireland would maintain “regulatory alignment” with the EU single market until the customs deal is concluded.

This is seen as toxic by some lawmakers—particularly those in the Northern Irish DUP party, which is propping up May’s government—as it would see the province treated differently from the rest of the U.K. and, in their eyes, theoretically threaten the unity of the United Kingdom if no customs deal is ultimately struck. The EU insists on the backstop because, without it, a hard border might have to return.

So now May is going back to the EU with a demand that the backstop be cut out of the agreement, to be replaced by unspecified “alternative arrangements.” The EU has repeatedly said the agreement is not open for renegotiation, and it reiterated that point mere minutes after Tuesday’s vote.

As for the non-binding amendment saying there cannot be a no-deal Brexit, the only way to put that into effect would be to cancel Brexit, or to get a majority to back the existing deal—which seems deeply unlikely at this point.

A no-deal Brexit might have been staved off by another amendment that would have compelled the British government to ask the EU for an extension of the Brexit date, but lawmakers rejected it.

Goldman still reckons there’s a 50% chance of Brexit being delayed.