By Elizabeth Howcroft
LONDON (Reuters) - The chances of Britain leaving the European Union without a trade deal have risen dramatically in the last three months, according to major investment banks, most of which now see the probability of such an outcome at 50% or higher.
Britain left the EU in January but is currently in a status-quo transition period, which ends on December 31 irrespective of whether or not a deal is agreed. On Monday, the two sides started a decisive week of talks, with one diplomat noting an improvement in "mood music".
But all six banks which participated in a Reuters poll in June are more pessimistic, with most citing UK legislation that would breach parts of the withdrawal agreement signed with the EU in January.
The move has drawn threats of legal action from the EU.
The most dramatic re-assessment was by Societe Generale, which said the bill "gravely damaged" trust. The probability of no-deal now stands at 80%, according to the bank, which had assigned a 17% chance in June.
Germany's Commerzbank, meanwhile, puts the probability of no-deal at slightly below 50%, versus 10% in June, a scenario which strategist Thu Lan Nguyen warns could hit the pound hard, possibly resulting in depreciation of "something around 10%".
The currency has fallen around 5% this month but with three months still to go before the transition period expires, options markets are pricing in more volatility ahead.
ING now believes the risk of no deal is 50%, up from 40% three months ago. Only a small proportion of this risk premium is priced by sterling, according to economist James Smith, who sees the currency possibly heading towards parity versus the euro.
How likely is a no-deal Brexit?https://graphics.reuters.com/BRITAIN-EU/bdwvkkldkvm/chart.png
Interactive version of banks' Brexit forecasts https://reut.rs/3mXuSkh
In a more detailed forecast, Standard Chartered stuck with a one-in-two chance of an agreement by the end of the year but also saw a 20% chance of the transition period being extended and a 30% chance of exiting without a deal.
JPMorgan, not included in the Reuters poll, expects the worst-case outcome to wipe at least three percentage points off UK gross domestic product in 2021.
It puts the risk of no-deal at one-in-three but told clients that "with brinkmanship part of the process it may appear higher than that before agreement is reached".
(Reporting by Elizabeth Howcroft; editing by Sujata Rao, Kirsten Donovan)