DEPSEC TREASURY DISCUSSES FINANCIAL MARKETS, IRAN

S E C R E T LONDON 000803

SIPDIS

NOFORN
SIPDIS

E.O. 12958: DECL: 03/18/2018
TAGS: EFIN ECON PGOV UK
SUBJECT: DEPSEC TREASURY DISCUSSES FINANCIAL MARKETS, IRAN
SANCTIONS WITH HM TREASURY CHIEF SECRETARY COOPER

Classified By: A/EMIN Sandra Clark, Reason 1.4 b & d


1. (C) Summary. Deputy Treasury Secretary Kimmitt outlined
on March 10 to Yvette Cooper, British Treasury Deputy
Secretary-equivalent, USG efforts to stimulate the U.S.

SIPDIS
economy and address problems in the U.S. housing market.
Cooper described efforts to revitalize the securitization
market and asked for USG views on IMF reform, including a
greater IMF surveillance role. Also discussed were the
proposed British tax on non-domiciles, cooperation within
Europe on Iran sanctions and sovereign wealth funds. The
Deputy Secretary's other meetings in London are reported
septel. End summary.


2. (SBU) Deputy Treasury Secretary Kimmitt told Yvette
Cooper, Chief Secretary to the Treasury, that the U.S.
economic fundamentals remain strong, despite problems in the
housing and financial markets. Growth is expected to be
positive this year, although it is slowing, especially in the
current quarter. He outlined the USG stimulus package, as
well as efforts by both the government (such as HOPE Now and
Project Lifeline) and the private sector to help homeowners
remain in their homes. The impact of these measures will be
felt in the third quarter, he concluded.


3. (SBU) Cooper raised prospects for the revitalization of
the securitization market. HM Treasury, she said, is
consulting with stakeholders to see if it is possible to
develop "gold standard mortgage-based" securities to get the
market going again. The question is how to do this without
adversely affecting existing securities. A final decision on
the way forward will not be ready until the pre-budget report
next fall, she said. Revitalizing this market would not help
with the current credit crunch, but may have a positive
impact later, she continued. The Deputy Secretary replied
that a similar idea has been under review in the United
States. The conclusion at present is that the private sector
will be able to identify solid securities as well as problems
without a cooperative vehicle. He added that these issues
will be addressed in the Financial Stability Forum (FSF)
report, due to come out before the April World Bank/IMF
Annual Meetings. The President's Working Group on Capital
Markets will be releasing its report shortly and he offered
to provide a copy to Cooper when it is released. Cooper
commented on the significant role played by financing from
the U.S. for mortgages in the UK. They agreed that U.S.
Treasury and HM Treasury officials should keep in close touch
on these issues.


4. (SBU) The Deputy Secretary raised the issue of the
proposed tax on non-domiciles in the UK, noting that it
raises many tax policy, tax interpretation and tax
administration issues. Cooper replied that HMG wants to
avoid double taxation of American taxpayers. It wants to be
sure that people will still be able to travel freely between
the United States and the United Kingdom and that trade flows
freely as well. The existing remittances process will
remain, she said. Kimmitt noted that there had been
discussions between British and U.S. tax policy experts and
that the proposal raises very technical issues which experts
need time to study. He suggested that there be greater care
taken when speaking publicly. We can work together, he said,
but we should not prejudge the final result until we see the
details of the British tax law and have a chance to review
their implications.


5. (SBU) Cooper then asked for the Deputy Secretary's views
on what more the IMF and the FSF could do to provide an early
warning of trouble in the financial sector. Kimmitt replied
that we need to address what is urgent, while not forgetting
to address what is important. The USG has called for reform
of the IMF and believes that Dominique Straus-Kahn, its
Managing Director, understands what that reform ought to be.
He agreed on the need to make better and broader use of the
IMF's surveillance capabilities, that it can help us "look
ahead and around the corner" but this role should not
distract the IMF from the urgent reform efforts. These
reforms need to be properly sequenced. Cooper agreed that
the IMF should not be distracted from its reform efforts, but
noted the need for a better way to anticipate problems. Most
observers did not anticipate the substantial and wide
reaching consequences of the credit crunch, she said and
suggested that the USG and HMG stay in close touch on these
issues.


6. (S/NF) The Deputy Secretary then asked about EU views
on financial sanctions against Iran, as well as Italy's
hesitation to designate Bank Melli. He recalled then
Chancellor Brown's 2006 speech in which he said that finance
ministries needed to play a security role by stopping the

financing of terrorism and proliferation. Nicholas Joicey,
Director, International Finance, replied that the UK was
discussing Bank Melli with the Italians and others, and would
like to work with the USG on this case. In response to a
question on domestic reform, Joicey explained that the UK and
the U.S. have different legal frameworks. The UK cannot at
present designate a party for engaging in proliferation
finance nor use classified materials in court cases although
both issues are under review. The UK is doing as much as it
can to thwart terrorist and proliferation finance, he
continued. HM Treasury has created an asset freezing unit
which froze more in the last year than in the previous five
years combined. The Deputy Secretary noted the London
financial sector wants to be as open and to be seen as open
as possible, especially to Middle Eastern investors.
However, those in the Gulf States are starting to recognize
that it is not in their interest to see the financial system
used for terrorism or proliferation finance purposes. Joicey
replied that the UK is making these same points in its
current role as president of FATF.


7. (SBU) Cooper told the Deputy Secretary that she
appreciated his article on sovereign wealth funds ("SWF") in
"Foreign Affairs" magazine, noting that she shared his views.
Sovereign wealth funds were a topic of a recent ECOFIN
meeting, she said. The Commission's views are broadly in
line with the UK's. The majority of member states' views are
in favor of SWF, although some member states have concerns
about funds from individual countries, she said. The EU is
engaged in international efforts to promote SWF transparency.
She agreed with the Deputy Secretary on the need to
distinguish between investments by state-owned enterprises,
which may be politically motivated, and investments by SWF,
which have been positive.


8. (U) Participants: USG: Deputy Secretary Kimmitt; Eric
Meyer, Office Director for Europe; Robert Saliterman,
Spokesman, International Affairs, U.S. Treasury; Sandra
Clark, A/EMIN. UK: Yvette Cooper, Chief Secretary to the
Treasury; Nicholas Joicey, Director, International Finance;
Robert Woods, Head of Global Economics Team, HM Treasury.


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