Identifier
Created
Classification
Origin
08LONDON2757
2008-10-31 12:07:00
UNCLASSIFIED
Embassy London
Cable title:  

SUMMIT ON FINANCIAL MARKETS AND THE WORLD ECONOMY

Tags:  ECON EFIN 
pdf how-to read a cable
VZCZCXRO0034
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #2757/01 3051207
ZNR UUUUU ZZH
P 311207Z OCT 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0280
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 LONDON 002757

SIPDIS

STATE/EEB: DAS NELSON, STATE/EEB/OMA: MARLENE SAKAUE, ALEX
WHITTINGTON
TREASURY/IMB: BMURDEN, WMONROE, CCARNES

E.O. 12958: N/A
TAGS: ECON EFIN
SUBJECT: SUMMIT ON FINANCIAL MARKETS AND THE WORLD ECONOMY
- UK POSITION

REF: A. SECSTATE 114420

B. LONDON 2738

C. LONDON 2710

D. LONDON 2683

E. LONDON 2603

F. LONDON 2573


I. Key Objectives and Priorities

(SBU) The UK strongly supports the calling of the G20
November 15 Summit, and favors a general statement of
principles as the Summit's outcome (ref c). HMG would hope
that the discussion of principles would include those
identified by Prime Minister Brown in his seven-page document
"An International Programme for Strengthening The Global
Financial System", which he presented at the October 15-16 EU
Council Meeting. Those principles include: transparency, in
relation to risks and balance sheets; integrity, and the
absence of conflicts of interest in the system;
responsibility of management for the risks they undertake
sound banking practices, with respect to risk and capital
adequacy; and coordination across borders in recognition of
global markets. HMG also supports the creation of one or more
working groups to develop proposals for consideration at
future G20 meetings.

(SBU) Prime Minister Brown has not declared what his
aspirations are for the Summit, but we expect that he and
Chancellor of the Exchequer Darling will want to discuss a
new international financial architecture, which has long been
favored by Brown. The PM has said publicly in a speech before
business leaders on October 27 that there needed to be a new
international monetary system with an early warning system, a
crisis prevention system and a proper surveillance system.
In response to a question, the PM said the purpose of the
November 15 meeting is set up the machinery by which
agreements can be reached on the management of the
international economy and of the standards for financial
institutions. Darling, in a major policy speech on October
29th, called for new "international financial institutions
that are fit for our times, that can prevent another global
financial crisis and which foster cooperation as a first,
rather than last, resort." He also called for new
international lending facilities at the IMF and the European
Union to provide emergency, temporary lending, particularly
to emerging markets. Trade Secretary Gareth Thomas, at a
business roundtable on October 30, indicated that HMG also

hopes that there will be a declaration to reinvigorate the
Doha Trade Round at the November 15 meeting.

II. Key Concerns

In regards to the UK itself, HMG is primarily concerned about
ensuring adequate liquidity in the short term, making new
capital available to banks, allowing them to restructure
their finances while continuing to provide support to the
real economy, ensuring the banking system has the funds
necessary to maintain lending in the medium term, and
insuring bank deposits to head off any repeat of the run on
Northern Rock. With the UK sliding into recession, HMG is
increasingly concerned about the effects of the global crisis
on the real economy (see response to question IV). The UK
economy relies heavily on the construction and financial
services industries that are particularly vulnerable in the
current crisis. The recent volatility of the pound sterling
vis--vis the dollar and the Euro is also of heightened
concern.

III. Impact of the Financial Market Crisis on the Financial
Sector
IV. Actions Taken to Address the Financial Crisis

Two banks have failed, Northern Rock and Bradford and
Bingley. Several other banks have been severely affected by
the crisis, including Abbey, Barclays, HBOS, HSBC, Lloyds
TSB, Nationwide Building Society, Royal Bank of Scotland and
Standard Chartered.

HMG has agreed to inject GBP 37 billion into three banks:
Royal Bank of Scotland (RBS),Lloyds TSB and HBOS (refs e and
f). The government will own a majority stake, up to 70
percent in RBS, and more than 40 percent in Lloyds and HBOS.
The three banks have suspended dividend payments on ordinary
shares until they fully repay the GBP 9 billion in preference
shares issued by the government. The banks will face
restrictions on executive pay and have agreed to pay their

LONDON 00002757 002 OF 002


2008 executive bonuses in shares. HMG has increased deposit
insurance to GBP 50,000, and has also prohibited
short-selling of stocks, on a trial period that ends on
January 31, 2009. Barclays and HSBC have decided not to
participate in the government scheme. Barclays is raising
GPB 7.3 billion by selling securities to the Qatar Investment
Authority, the Challenger investment vehicle owned by the
Qatari royal family, and Sheik Mansour Bin Zayed Al Nayan of
the Abu Dhabi royal family. HSBC received a GBP 750 million
capital injection from HSBC Holdings PLC, its international
parent company.

PM Brown told the House of Commons on October 20 that HMG
will increase borrowing to support the economy. Despite
public finances reaching a record deficit in the first six
months of the financial year (which begins in April),HMG
will support mortgage holders, small firms and employees
through "carefully targeted, rigorously worked through
investments." HMG will also bring forward construction
projects on schools and hospitals.


V. Current Economic Situation/Near-Term Outlook

The UK economy is likely to be entering a recession,
according to the BOE (refs b,c). GDP growth was negative 0.5
percent in the third quarter. The credit crunch, combined
with a fall in real disposable incomes, poses the risk of a
prolonged slowdown in domestic demand. The UK's GDP is
expected to shrink by 1 percent next year, followed by a
modest recovery in 2010 with GDP growth of 1 percent. If
these predictions hold true, 2009 will be the first full year
of shrinking output since the last recession in 1991, when
output fell by 1.4 percent over the year prior.

Inflation has jumped to 5.2 percent in September, above the
BOE expected 5 percent rate and significantly above the two
percent target rate. Surging household utility and food
prices were the key factors behind this jump. The declining
price in oil is expected to bring inflation down below the
five percent mark in October, but inflation will remain a
significant concern. In September, unemployment recorded its
biggest rise in 17 years, jumping by 164,000 workers to 1.79
million, the largest rise since 1991. The weakening global
economy is also affecting the UK's trade deficit. Although
it narrowed slightly in August to GBP 4.7 billion from GBP
4.8 billion, the gap was GBP one billion higher than analysts
had expected.

The effects on the real economy have also become evident: car
sales were down 21 percent in September alone and house
repossessions are set to rise by 50 percent to 45,000 this
year. The Chartered Institute of Purchasing and Supply's
(CIPS) index dropped to 46 from 49.2 in September, the
largest ever drop since recording began in 1996, and the
fifth straight month of decline. (A reading below 50 signals
service industry contraction). The Federation of Small
Businesses reported that the credit crunch is closing 27 pubs
a week and 40 businesses per day across the UK. The near
future remains bleak, according to the Ernst and Young ITEM
Club Q3 report, which predicts the consumer economy will
collapse by the end of the year and will not edge toward
positive territory until late 2010 before staging a "feeble"
recovery of 1.9% growth in 2011. House prices have declined
15% and many predict a total decline of as much as 30%.

Embassy Point of Contact

(U) Kathleen Doherty, Economic Counselor, will be the Embassy
point of contact, and can be reached by OpenNet email at
dohertyka@state.gov and ClassNet email at
dohertykx@state.sgov.gov.

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

LeBaron