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P 221651Z JAN 09
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RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1212
RUEHED/AMCONSUL EDINBURGH PRIORITY 1060

UNCLAS SECTION 01 OF 02 LONDON 000187 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV UK
SUBJECT: GOVERNMENT ANNOUNCES THIRD STRAND OF ECONOMIC RECOVERY 
PACKAGE 
 
REF: 08 State 134459 
 
LONDON 00000187  001.2 OF 002 
 
 
¶1.  (U) HMG announced new measures to reinforce financial stability 
and ensure the resumption of lending on January 19.  To improve 
banks' access to wholesale funding markets, HMG will provide full or 
partial guarantees to eligible AAA-rated asset backed securities 
from April.  Additionally, HMG will extend the drawdown window of 
its existing credit guarantee scheme from April 9 to December 31. 
To address the loss of mortgage lending capacity, HMG said Northern 
Rock will no longer need to actively pursue a policy of rapidly 
reducing its mortgage book to repay its government debt.  To 
increase the availability of corporate credit, the Bank of England 
will establish an asset purchase scheme, authorized by HMT, to buy 
up to GBP 50 billion high quality private sector assets, financed by 
the issue of Treasury bills.  (Note: HMT said this facility could be 
used by the Bank's Monetary Policy Committee as a way to meet its 
inflation target of two percent - potentially paving the way for 
quantitative easing.  End note.)  To reduce banks' uncertainty about 
the value of past investments, HMG will offer capital and asset 
protection on assets most affected by economic conditions (details 
of this measure are expected in February).  To provide banks with 
access to long-term liquidity, the Bank of England will extend its 
Discount Window Facility, increasing the length of time assets can 
be swapped for from 30 days to one year.  Finally, HMT said in the 
longer term, it will work with the FSA to incorporate 
counter-cyclical measures into capital ratio requirements, requiring 
banks to build up buffers in good years that they can draw on during 
economic downturns. 
 
¶2.  (U) Prime Minister Gordon Brown said the measures focus on 
helping British banks struggling to fill a gap in credit provision 
left by the retreat of foreign and non-bank lenders.  He said the 
package was the third part of HMG's strategy following last year's 
bank recapitalization program and subsequent fiscal stimulus 
measures.  He stressed the importance of working in partnership with 
other countries facing the same problems and preventing a "damaging 
de-globalization" and return to protectionism.  Chancellor Darling 
told MPs the measures would remove uncertainty and accelerate the 
resumption of lending, a necessary precondition for recovery. 
 
Package Has "Reasonable Chance" Of Success 
------------------------------------------ 
 
¶3.  (U) HMG's package has a "reasonable chance" of unblocking the 
flow of credit within the banking system and capital markets, 
according to Paul Tucker, Executive Director of Markets at the Bank 
of England.  Tucker told MPs of the Treasury Committee that there 
are no silver bullets, but that he believes it is a good package. 
He said the asset purchase scheme, whereby the Bank will have the 
authority to purchase high quality corporate bonds, does not 
immediately amount to quantitative easing.  However, he did not 
totally reject suggestions that this might happen soon.  He warned 
MPs that the UK package needs to be accompanied by similar packages 
internationally if it is to succeed.  Tucker, soon to be responsible 
for financial stability at the Bank, supported HMG's fiscal stimulus 
but said it is vital that the government make a credible commitment 
to get the public finances on a sustainable footing.  Mervyn King, 
Governor of the Bank of England, showed support for HMG's package 
during a speech in Nottingham.  He said asset purchases can increase 
the supply of money and credit, thereby increasing spending.  He 
warned, however, that there is a fine line between helping to oil 
the wheels in markets which are temporarily impaired, and 
artificially supporting markets in which there is no underlying 
demand.  Therefore, the Bank will need to be satisfied that there is 
genuine demand for the asset in normal conditions before it is 
eligible for the asset purchase facility.  King also noted that such 
purchases involve taking more credit risk onto the public sector 
balance sheet. 
 
¶4.  (U) HMG's measures will be critical to increasing lending to the 
economy, according to the British Bankers' Association.  The Council 
of Mortgage Lenders welcomed the broad thrust of the package, 
particularly the guarantee scheme for asset-backed securities which, 
it believes, will help restart the securitization market.  If the 
measures are fully implemented, they should stem a downward 
recessionary spiral and provide a stable economic platform, 
according to the Confederation of British Industry, which welcomed 
HMG's bold response to the economic downturn.  It welcomed the 
"extra extraordinary" policy solutions and said they are essential 
pre-cursors for economic stability, which will expand the 
availability of credit, open new channels of credit and get the 
economy working. 
 
Market Reaction 
--------------- 
 
¶5.  (U) The market and public reaction to the latest set of 
government initiatives suggest there is no confidence that HMG's 
 
LONDON 00000187  002.2 OF 002 
 
 
policies are working, according to Conservative Party Leader David 
Cameron.  Cameron's comment during the Prime Minister's Questions, 
January 21, alluded to the reaction of bank shares following the 
Chancellor's announcement on January 19: Barclays' share price fell 
17 percent; Lloyds Banking Group fell by almost a third; and RBS 
closed down 67 percent.  (Note: These large declines are also 
attributable to rumors of further nationalizations in the banking 
sector.  End note.)  Sterling fell to its lowest level against the 
U.S. dollar in more than five years, hit a record low against the 
yen and fell against the euro following the announcement.  This 
weakening is partially explained by fears that the rescue package 
will substantially increase the UK's debt beyond the 8 percent of 
GDP projected by the Chancellor in his Pre-Budget report. 
 
TUTTLE