Is UK heading to no-trade-deal Brexit? Banks assess risk

By Elizabeth Howcroft

LONDON (Reuters) - Britain and the European Union remain far apart in negotiations on a new trading relationship and analysts at many banks say the risk of a no-trade-deal Brexit at the end of the year is firmly back on the table.

Talks are being held this week in Brussels but Britain's refusal to extend the end-2020 deadline has increased pressure to reach a deal by then or be cast adrift without any trading arrangements in place.

"We think there is a 50-50 chance of a no trade-deal Brexit," said Sarah Hewin, chief Europe economist at Standard Chartered.

"There are big hurdles still and no one is really talking about Northern Ireland at the moment," she said, referring to one of the main stumbling blocks in past negotiation rounds.

Berenberg analysts put a 60% chance on a deal not being reached in time, but expect a transition to World Trade Organization (WTO) rules via small steps, with only a 5% probability of a disorderly outcome.

Click for interactive chart https://fingfx.thomsonreuters.com/gfx/editorcharts/gjnvwwagjvw/index.html

BARE-BONES DEAL

Commerzbank sees a 20% 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% chance of Britain leaving without an agreement in place, they think any deal will be "weak with very limited reach".

JPMorgan too predict a deal will be reached but only after the current deadline.

ING economist James Smith sees a 40% probability of a no- deal Brexit - twice as likely as a year ago -- but sees little difference between having a free trade agreement and exiting without one.

"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," Smith added.

Societe Generale FX strategist Kit Juckes assigns a 16.7% probability to a no-trade-deal outcome but sees the UK heading for a bare-bones agreement, adding to strains on the economy.

"If the global economy does badly and we do a bad trade deal we will do worse than most," he added.

(Graphic: Sterling weak as Brexit talks grind on, https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzwmwwvw/gbp.PNG)

(Reporting by Elizabeth Howcroft; additional reporting by Olga Cotaga; Editing by Gareth Jones)