Identifier
Created
Classification
Origin
08LONDON2542
2008-10-06 14:22:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy London
Cable title:  

PM BROWN DOES THE UNEXPECTED IN ADDRESSING

Tags:  ECON EINV PGOV UK 
pdf how-to read a cable
VZCZCXRO9390
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHLO #2542/01 2801422
ZNR UUUUU ZZH
P 061422Z OCT 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0007
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1132
RUEHED/AMCONSUL EDINBURGH PRIORITY 0992
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 LONDON 002542 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV UK
SUBJECT: PM BROWN DOES THE UNEXPECTED IN ADDRESSING
ECONOMIC PROBLEMS

LONDON 00002542 001.2 OF 002


UNCLAS SECTION 01 OF 02 LONDON 002542

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV UK
SUBJECT: PM BROWN DOES THE UNEXPECTED IN ADDRESSING
ECONOMIC PROBLEMS

LONDON 00002542 001.2 OF 002



1. (SBU) Summary: The past 72-hours have seen dramatic
political maneuvering in London to confront the deepening
economic crisis. The first surprise was PM Brown's
appointment of his long-time nemesis, the highly
controversial figure, Peter Mandelson as business secretary,
followed by the creation of a 17-member National Economic
Council. Both measures are energetic steps to address the
crisis, but also a reinforcement of Brown and Chancellor
Alistair Darling's recent warnings of the magnitude of the
crisis. UK officials publicly expressed satisfaction with the
outcome of the Paris October 4th, G4 meeting. However,
Germany's October 5 announcement of a purported blanket
guarantee of bank deposits, following a similar step by
Ireland early last week, caught UK officials off-guard, and
they are now scrambling to adopt urgent measures to shore up
the financial system. With the London Stock Exchange down
five percent in morning trading on October 6, adoption of
these pressure is even more pressing. Among steps under
consideration are a taxpayer-funded recapitalization of banks
and a broader government guarantee of bank deposits. End
Summary.

Mandelson's appointment
--------------


2. (SBU) Mandelson's return to London, after three years in
Brussels as Trade Commissioner, sent shockwaves throughout
the political community. Brown and Mandelson have long been
at odds with each other, and had reportedly not been on
speaking terms until recently. Beyond personality
differences, Brown, when Chancellor of the Exchequer, and
Mandelson, then business secretary in the Blair government,
often clashed over the direction of economic policy.
Mandelson's appointment has been called his political
resurrection by some political pundits. Mandelson, the
once-disgraced politician forced to resign twice after
charges of impropriety, is being heralded as a savior, they
say, charged with helping to restore faith and confidence in
the UK economic system. Mandelson will join Chancellor
Darling, and 15 others, as members of the newly-created
National Economic Council. (Note: Mandelson did not attend
the inaugural session of the NEC. According to press reports,
he was rushed to the hospital with kidney stones the morning

of the 6th. End Note.)


3. (SBU) Dubbed by the media as a &War Council," the NEC,
which met for the first time October 6, is charged with
assessing and responding to the implications and the
challenges of the global economic crisis and the latest
developments in the commodities markets, according to a HMG
press release. On a longer-term scale, it is also intended
to deal with energy supplies, employment needs, and small
business creation.


4. (SBU) Rather than having time to assess the crisis,
however, the NEC is in reaction mode after weekend events in
other EU member states. Germany's purported announcement of
a blanket guarantee of its banks, deposits, and Denmark's
decision to the same (and Ireland's earlier in the week),has
upped the pressure on the HMG to take measures that would
stave off any capital flight from London to markets with a
higher government deposit guarantee. While the UK raised
government guarantees from 35,000 to 50,000 just last week,
the amount likely will be raised further to counterbalance
the measures taken by Germany and the others. (On October 6,
according to the press, German Chancellor Merkel backtracked
a bit, clarifying that she made a political commitment that
no German savers would lose money, but did not expressly
state that all deposits were guaranteed.)

UK Rescue Plan
--------------


5. (SBU) Just two weeks ago, the HMG insisted that no
wide-ranging bailout package was under consideration.
However, even before this weekend's events, HMT and BOE
officials were starting to put together elements of a
financial support package. After the FTSE fell five percent
in the morning of October 6, to its lowest level in almost
four years, the need for a rescue package heightened as the
market was not reassured by the G4 talks over the weekend.


6. (SBU) UK authorities are focusing primarily on both the
liquidity of banks and their capital. The BOE, in addition
to conducting U.S. dollar-denominated auctions, is expanding
the collateral accepted under BOE's liquidity operations. UK
authorities are also considering, in extremis, a

LONDON 00002542 002.2 OF 002


taxpayer-funded recapitalization of UK banks, perhaps through
the issuance of preference shares, and the provision of
official funds as capital backstop for ailing banks. The
government probably will introduce a new banking reform bill
this week, which will replace the emergency legislation that
allowed its interventions in Northern Rock and Bradford and
Bingley.


7. (SBU) The Chancellor has ruled out any interest rate
intervention and rejected calls to temporarily suspend the
Bank of England's independence, during a BBC interview on
October 5. Vince Cable, the Treasury spokesman for the
Liberal Democrats, had urged the Chancellor to "clear the
road" for large interest rates cuts by suspending the
Monetary Policy Committee's mandate to keep CPI below two
percent. Darling responded, saying that HMG needs to be
flexible with public finances, and that he will outline,
during a speech on October 8, how governments ought to react
to the global shock. It is widely anticipated that Darling
will relax the government's fiscal rules, which limit public
debt to 40 percent of GDP, during his pre-budget report later
this month.

EU Coordination
--------------


8. (SBU) Publicly, UK officials expressed satisfaction with
the Paris October 4, G4 discussions. Prior to this weekend's
meeting, UK officials told us that they were skeptical that a
coordinated European meeting was possible, and even
questioned if it was desirable. The quick action to bail out
Fortis showed that that individual member states were capable
of responding to the crisis in an adequate manner, they said.
They did express outrage, though, at Ireland's unilateral
action to guarantee deposits of six Irish banks, and argued
that it was contrary to EU rules against national
discrimination and perhaps state aid.




Visit London's Classified Website:
http://www.intelink.sgov.gov/wiki/Portal:Unit ed_Kingdom

LeBaron