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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #2460/01 2701454
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P 261454Z SEP 08
FM AMEMBASSY LONDON
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1117
RUEHED/AMCONSUL EDINBURGH PRIORITY 0985

UNCLAS SECTION 01 OF 02 LONDON 002460 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ENRG IR EINV UK
SUBJECT: London Financial Experts Anxious for Conclusion of U.S. 
Support Package, Pessimistic on UK Outlook 
 
LONDON 00002460  001.2 OF 002 
 
 
Summary 
------- 
 
¶1. (SBU) Uncertainty about the fate of the USG proposed $700 billion 
support facility has paralyzed UK financial markets, senior HMT 
officials told Econoffs on September 25.  There is no inter-bank 
lending at the moment, and all the big players are waiting for news 
about the plan before making significant market moves, Steve 
Pickford, Director International Finance, commented. While the 
Treasury is concerned about the bleak macro-economic picture in the 
UK and the dim prospects for a quick recovery, HMG is not planning 
any wide-reaching financial support package. Bankers share the same 
pessimistic view about the UK economy. U.S. bank representatives 
told econoffs on September 23 that the UK economic outlook is likely 
to get worse. The UK is likely to be in a technical recession by the 
end of the year, compounded by a severe slump in the housing market 
and weak public finances.  Sterling will continue to fall against 
the dollar, stabilizing at around $1.74 by December 2009, they 
predicted.  The political response to the economic crisis has been 
inadequate, argued the bankers. A 'surreal' Labour party conference 
exposed a political set detached from the realities of the financial 
crisis.  While in Brussels, EU Commissioner McCreevy is pursuing new 
proposals that seem as much an effort to create a personal legacy, 
than to address market failures, they stated.  End Summary 
 
HMT Welcomes USG Proposed Support Facility 
------------------------------------------ 
 
¶2. (SBU) While there might be questions about various details of the 
U.S. facility, a flawed plan is better than no plan, argued Steven 
Pickford, Director International Finance, HMT.  The absence of a 
plan would just worsen investor jitters and could create panic that 
would prove near impossible to mitigate. He added that unlike the 
U.S., the UK is not considering any wide-spread financial support 
package at this moment, though several short-term and intermediary 
steps have been taken - such as banning the short-selling of stocks 
until the end of January. Pickford suggested that better cooperation 
between U.S. and UK authorities on these measures, and more advance 
warning about steps under consideration, would be desirable. 
 
Gloomy Economic Outlook Gets Gloomier 
------------------------------------- 
 
¶3.  (SBU) The UK's economic outlook will remain gloomy through the 
medium-term, according to economists at JP Morgan.  Negative growth 
of 1 percent in both Q3 and Q4 of 2008 will indicate a technical 
recession.  Their outlook is shaped by the drag on the economy from 
the housing market, with prices forecast to fall by a further 10 to 
25 percent by 2010.  Citigroup analysts believe a total decline of 
30 percent is not improbable, but it is unlikely that default rates 
will be as bad as 1991, during a similar housing slump.  While they 
expect the U.S. housing market to recover in early 2009, problems in 
the UK will persist because homeowners are more highly leveraged. 
Housing price declines are likely to be relatively uniform across 
the country, according to analysts at Morgan Stanley. 
 
¶4.  (SBU) The bankers were pessimistic about HMG's outlook of 
recovery by 2010.  They believe the shape of the outlook will be 
dependent on the fiscal deficit, which will be hurt by a significant 
reduction in corporate tax revenue.  They noted that infrastructure 
projects, such a Crossrail (a train line running east to west across 
London), will be postponed, if not cancelled, due to lack of 
funding. 
 
Sterling Has Further To Fall Against The Dollar 
--------------------------------------------- --- 
 
¶5.  (SBU) While Sterling has experienced a large correction over 
recent weeks, it has a little further to fall against the dollar. 
JP Morgan analysts expect the pound to fall to $1.74 by the end of 
2009 (from approximately $1.855 currently).  This weakening will be 
assisted by a likely turn in the interest rate cycle.  Interest rate 
cuts are increasingly likely following speeches by Sir John Gieve, 
Deputy Governor of the Bank of England, and Kate Barker, a Member of 
the Bank's Monetary Policy Committee, in which they indicated that 
the dampening effect of the credit crisis on the economy could be 
bigger than anticipated - hinting that they may vote in favor of a 
rate cut.  Morgan Stanley holds to its "smile" forecast for the 
GBP/USD rate.  While Sterling may continue to weaken slightly, it 
should slowly recover by the end of 2009. 
 
"Surreal" Labour Party Conference 
--------------------------------- 
 
¶6.  (SBU) One banker had received feedback from the Labour party 
conference, held in Manchester, that the atmosphere was "surreal", 
with politicians and Labour delegates detached from the reality of 
 
LONDON 00002460  002.2 OF 002 
 
 
the financial crisis.  Another commented that the crisis has caused 
significant friction between Number 10 and government departments. 
When Number 10 introduces proposals, such as the suspension of stamp 
duty (a tax paid when buying property), the departments fight back, 
arguing that the funds are not there to support the project. 
 
Action in Brussels, the view from London 
---------------------------------------- 
 
¶7.  (SBU) There was consensus among the bankers that Charlie 
McCreevy, European Commissioner for the Internal Market and 
Services, is taking a tough line to push through proposals for 
regulating Credit Rating Agencies (CRA) and revising the Capital 
Requirements Directive (CRD) prior to the end of his term as 
Commissioner.  The proposals will need to be passed by the beginning 
of next year which, the bankers argued, will mean little 
consultation with business will be conducted. Parliament will also 
have little time to debate the proposals.  One bank representative 
said that McCreevy has changed from a light-touch, laissez-faire 
liberal to more of an "interventionist" - looking to have 
international organizations address the causes of financial market 
instability.  Some of the bankers argued that McCreevy is looking to 
create a personal legacy, by seemingly addressing the problems 
without giving sufficient consideration of long-term effects. 
 
¶8. (SBU) The bank representatives said the Commissioner's CRD 
proposals are extreme and one quoted him as saying "I'm going to 
kill the originate to distribute model" when speaking of his 
proposals to require originating banks to hold 10 percent of all 
securities they underwrite.  Another roundtable participant was 
critical of the proposal given that it had not been subject to the 
usual impact assessment procedures.  One banker stated that among 
Member States, eleven, including Spain, France, Italy, Germany and 
the UK were opposed to the proposals.  However, it is unclear what 
states will voice their opposition if the Originate to Distribute 
rules are only applied to Collateralized Debt Obligations and not 
traditional bond instruments. 
 
¶9.  (SBU) While Brussels is seeking to assume greater influence in 
responding to the crisis, there is no unanimity on how to deal with 
the immediate fallout, said Pickford from HMT.  Nor is there 
consensus about whether a new regulatory framework should be 
created.  Member states are being affected differently, with several 
of the smaller countries still measuring positive growth rates. 
There might be one unintended result of the crisis: a fracturing of 
the consensus about deficit spending.  While the UK has already 
exceeded the target the Growth Stability Pact 3 percent fiscal 
deficit target, Pickford ruefully admitted, other countries might 
use the crisis to push for a loosening of this target. 
 
TUTTLE