Identifier
Created
Classification
Origin
08LONDON2486
2008-09-30 14:26:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy London
Cable title:  

SCENESETTER FOR CODEL SHELBY'S OCTOBER 10-12 VISIT TO

Tags:  ECON EFIN KTFN UK 
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VZCZCXRO5013
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #2486/01 2741426
ZNR UUUUU ZZH
R 301426Z SEP 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC 9943
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
UNCLAS SECTION 01 OF 02 LONDON 002486 

H FOR CODEL SHELBY

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KTFN UK
SUBJECT: SCENESETTER FOR CODEL SHELBY'S OCTOBER 10-12 VISIT TO
LONDON

Summary
-------

UNCLAS SECTION 01 OF 02 LONDON 002486

H FOR CODEL SHELBY

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KTFN UK
SUBJECT: SCENESETTER FOR CODEL SHELBY'S OCTOBER 10-12 VISIT TO
LONDON

Summary
--------------


1. (SBU) The UK economy is reeling from the effects of the global
economic crisis, with housing prices falling even faster and further
than in the United States. The UK economy continues to slide into
recession with negative GDP growth forecast for the second semester
of 2008. Inflation, fueled by energy, food, and import prices, is
projected to hit 5 percent. Prime Minister Brown has been personally
engaged in trying to mitigate the effects on the UK economy and to
hammer out global solutions. Brown met with the President September
26 to discuss the global economic crisis and appropriate U.S./UK
government responses. On the margins on the UN General Assembly
Meeting in New York, Brown also met with various heads of state and
leaders of the financial sector to explore options for intervention.
He has publicly called for the creation of an international
financial watchdog, whose goals would be to increase transparency,
improve cooperation with regulators, create better early-warning
systems, and shore up credit-rating agencies duties. UK officials
would be greatly interested in hearing the details of the U.S
financial support package.


2. (SBU) The bleak economic picture has weakened the embattled Prime
Minister, who has seen his poll numbers drop significantly over the
past year. The PM did however manage to reassert his leadership
during the recent Labour Party Conference. Labour received an
immediate bounce from the annual event, with poll ratings jumping to
31 percent from 17, while the Conservatives dropped from 50 to 41
percent. (The Conservative Party holds its Congress this week so
Labour's gains might be short-lived.) As Chancellor, Brown imposed
strict limits on deficit spending to control public debt, but Labour
policies during the past ten years of economic growth now leave
little room for fiscal stimulus without abandoning these limits.


3. (SBU) The British government strongly supports U.S.
anti-terrorist finance efforts, but has resource constraints and
legal limitations which obstruct it from being as proactive as the
USG would like. End Summary

The Meeting with the President
--------------


4. (SBU) PM Brown was to raise with the President his idea for an
international financial watchdog, to be set up through an existing

entity such as the G-20. Brown attended the UN General Assembly in
New York and gave a speech calling for coordinated international
action to resolve the financial crisis. While in New York, Brown
discussed this and other ideas for a global response to the
financial crisis with world leaders (Spain, Italy, EU, Australia,
Brazil) and with Wall Street titans (George Soros, BlackRock,
Blackstone.) So far it appears that Brown's proposals have not
gained much traction.

Difficult Times for PM Brown
--------------


5. (SBU) PM Gordon Brown appears to have successfully reasserted
his leadership of the Labour Party and bought himself some time
against possible leadership challengers following the Labour Party
Fall Conference in Manchester September 20-24. Reaction to Brown's
September 23 speech, billed in advance as the "speech of his life,"
was well received by delegates in Manchester. Attendees told
Embassy London officials they thought the PM hit all the right notes
and successfully managed to put the Conservative Party on the
defensive going into its conference starting on September 29,
especially over Tory lack of recent economic experience. Although
Brown has refused to comment publicly on a possible Cabinet
reshuffle, media reports he could announce a new Cabinet lineup on
October 2 or 3, just after the Tory Party conference ends.


6. (SBU) Although PM Gordon Brown has recently gained ground in the
polls, he does not have nearly the latitude Tony Blair had to take
on a major new foreign policy commitment or personally lead the UK
public to support a difficult foreign policy decision such as a new
commitment of UK troops abroad. The British public is also very
skeptical about new foreign commitments and uncertain about
medium-term outcomes in Afghanistan. Although the Iraq War has
faded from the domestic political landscape with Blair's
resignation, the war has almost no popular support. Afghanistan is
still considered the "good war" in comparison to Iraq, and UK
military engagement has cross-party support in Parliament.
Nonetheless, Afghanistan is also increasingly viewed in the UK media
as a complicated, uncertain venture with no clear end, especially as
British military deaths have spiked over the past year.

The Financial Crisis in the UK
--------------


7. (SBU) The global financial crisis has reverberated in the UK,

LONDON 00002486 002 OF 002


with home prices having fallen about 11 percent since their peak,
and inflation at a ten-year high. Thousands of employees in the
financial services sector have lost their jobs as a result of the
crisis. Because the UK financial service industry in recent years
has provided around 20% of the UK government's tax revenues, the
faltering financial market will significantly reduce the
government's tax receipts.


8. (SBU) GDP growth in the UK was 0.0 per cent in the second
quarter of 2008, the worst quarter in 16 years. Inflation hit 4.7%
in August, and the Bank of England predicts it will rise to 5% by
the end of the year. Employment numbers remain relatively stable,
but unemployment has ticked up to 5.5%. The Bank of England is faced
with the tough choice of combating inflation or attempting to spur
economic growth.


9. (SBU) The PM and his economic team have been criticized for a
perceived failure to address the concerns of the average citizen,
and many have speculated that the PM is politically vulnerable. The
PM's speech to Labour party officials, in which he underscored that
he was the right person to be at the helm during a financial crisis,
has given him some breathing room to turn poll numbers around. To
date, the Labour Government has nationalized two large banks
(Northern Rock and Bradford and Bingley),but has not proposed
widespread structural support or reform measures to shore up the
financial sector, though several smaller measures have been adopted.
BOE has supported dollar money markets through a recent $40 billion
overnight facility. The UK government followed the U.S. lead in
banning the short-selling of stocks, and has created a liquidity
scheme.


10. (U) The government gave its consent to Barclay's recently
announced agreement to purchase HBOS, the UK's largest mortgage
lender. A year ago, such a merger would have been unthinkable on
competition grounds, but the risk to the stability of the UK
financial system posed by HBOS trumped competition rules. To ensure
that a Barclays/HBOS deal could be reached quickly, Secretary for
Business, John Hutton, took the extraordinary step of announcing the
government's intention to intervene "in the public interest" and
override UK competition law. A government intervention will require
legislation, which will not be considered until Parliament resumes
on October 6.

UK Reaction to Events in the U.S.
--------------


11. (SBU) The Labour government has been closely watching actions
in Washington. Senior Treasury officials told us approval of a
financial support package in Washington was essential to calming the
markets globally. With Barclays and Lloyds having significant
market share in the U.S., the eligibility of UK financial
institutions to the proposed $700 billion facility was on PM Brown's
agenda with President Bush. On September 20, Brown said that he
would seek support from the USG to have $8 billion returned to
Lehman UK from Lehman New York, transferred on the eve of Lehman New
York's collapse. The PM has indicated that the money would be used
to pay final salaries to UK-based employees.

Terrorist Finance
--------------


12. (SBU) The UK remains our primary and most reliable ally on
terrorist finance issues. Our goals and ideals are very similar,
and we openly share information and coordinate on individual
designations and overall strategy. The UK's domestic asset-freezing
regime, however, has been challenged by the High Court (trial
court),and HM Treasury has argued to maintain their system in the
Court of Appeals. A decision is due soon, and will assist the
British government in determining their red-lines in modifying the
EU's asset-freezing regime, which has also been partially challenged
by a European Court of Justice decision. Due to resource
constraints, and concerns about legal challenges from increasingly
assertive UK and European courts, the British government is not as
proactive as the USG wishes. They have prioritized their cases to
those that have a direct effect on British soil, interests and/or UK
citizens.

TUTTLE