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Viewing cable 08LONDON2757, SUMMIT ON FINANCIAL MARKETS AND THE WORLD ECONOMY

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Reference ID Created Released Classification Origin
08LONDON2757 2008-10-31 12:07 2011-08-25 00:00 UNCLASSIFIED Embassy London
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