Cablegate: Brown Receives Bounce From Bail-Out Plan;
PP RUEHAG RUEHROV
DE RUEHLO #2603/01 2891403
ZNY CCCCC ZZH
P 151403Z OCT 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0078
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 1070
RUEHOT/AMEMBASSY OTTAWA PRIORITY 1177
RUEHKO/AMEMBASSY TOKYO PRIORITY 1176
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 LONDON 002603
EO 12958 DECL: 10/15/2018
TAGS ECON, EINV, PGOV, UK
SUBJECT: BROWN RECEIVES BOUNCE FROM BAIL-OUT PLAN;
INVESTORS STILL CAUTIOUS
Classified By: Classified by Acting Minister Counselor Kathleen Doherty for reasons 1.4 b and d.
1. (SBU) Summary: The U.K. government’s agreement to pump GBP 37 billion into three of Britain’s largest banks, along with similarly dramatic moves undertaken in the U.S. and in the rest of Europe, buoyed, at least temporarily, London’s stock markets, with minor gains posted in the first two days of this week. PM Gordon Brown’s stock has also risen in recent days, with the President of the European Commission Jose Manuel Barroso publicly calling the nearly Europe-wide, multi-billion dollar bank bail-out plan as “the Brown Plan,” and pundits across the political spectrum at home hailing the PM as “the man who saved the financial system.” Most in London are waiting to see if the recovery in stock market prices will be sustained throughout the week (the FTSE is down 4 percent in trading on October 15th) before even considering whether the “worst is over.” Bleak economic news continues to trickle in: U.K. inflation reached 5.2 percent in September, up .5 percent from August figures, with the annual rate of inflation of energy and other household utility bills reaching 15 percent - the highest since 1989. End Summary.
Pumping Up The Volume
2. (SBU) Following a weekend of talks with Britain’s largest banks, HMG agreed to inject GBP 37 billion into three banks: Royal Bank of Scotland (RBS), Lloyds TSB and HBOS. 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 shelved their 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 2008 executive bonuses in shares. (Comment: The restrictions on executive pay have been particularly welcomed by British unions, which have long-called for bonuses to be curbed. End Comment.) The government and the banks are in discussions about how many board seats the government will have and about other managerial decision-making. In contrast, Barclays has rejected the government’s recapitalization plan for the bank, saying it would, instead, raise GBP 7 billion and cancel its quarterly dividend to raise GBP 2 billion. The Bank also plans to raise more than GBP 6 billion in preference and common shares. On October 8, HMG had indicated that it stood ready to partially nationalize seven UK banks, including Barclays, by investing GBP 50 billion in preference shares, ordinary shares, or permanent interest-bearing shares.
Waiting to Exhale
3. (C) Although stock prices have made some gains, and inter-bank lending has started - though just a trickle in volume - industry leaders believe it would be premature to call the crisis over. Gary vonLemden, Corporate Head, Europe, Citigoup (Please protect), told econoff that the rescue plan will not directly move to re-open the bond and commercial paper markets, and until they re-open, banks will be remain under pressure. There has not been a single corporate bond issue since August, he stated. “The government’s scheme protects the taxpayer and is likely to make money. It will also make finance easier to obtain that it would otherwise have been. Whether that gets immediately in market prices, whether on inter-bank or retail lending, is harder to judge,” observed Ben Broadbent, chief economist, Goldman Sachs. Even the Chairman of the Treasury Select Committee, John McFall, has expressed concerns that the GBP 37 billion being injected into three of Britain’s largest banks, might not be enough. “It is a minefield we are tiptoeing through,” he stated, and called on banks to provide greater detail of their exposure to derivatives and other complex assets.
4. (SBU) Others are concerned about the macro-economic situation. 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
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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 to 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.
A New Dawn For Brown
5. (SBU) After a year of plummeting poll numbers and questions about his ability to lead, Gordon Brown is suddenly riding high. On October 13, the same day that he was awarded the Nobel Prize for Economics, Paul Krugman published a New York Times op-ed entitled, “Gordon Does Good,” praising the PM and his team for his quick actions to stave off a further collapse of the financial industry and to lay down the foundation for a new global financial system. Brown’s plan to recapitalize banks, first announced on October 9, and then fine-tuned over the weekend was heralded by Krugman and many others as the missing element in all previous rescue plans - and a step subsequently adopted in several other countries. Brown has also received praise for riding to the rescue of the European Union. President of the European Commission Barroso told the media October 14: “We needed a global solution for a global problem and we ended up with what I will call the ‘Brown plan’...The UK was amongst the first to propose comprehensive plans for working together in Europe.”
6. (C/NF) Brown and Labour are up in the polls: a YouGov/Sunday Times , poll released on October 13 showed Labour popularity at 33 percent, up 3 points, and the Conservative Party at 43 percent, down three points. Brown and his economic team were also judged as better able to handle the crisis than their Tory counterparts. Even Tory political leaders are ruefully acknowledging Brown’s achievements. At an Ambassador-hosted breakfast for NY Times journalist Tom Friedman on October 14, Gregory Barker, MP, Shadow Minister for the Environment, stated that if Brown were to successfully stabilize the economy, he would not be surprised if the PM called for early elections, to try to capitalize on his helmsmanship of the economic recovery. This sentiment was echoed by Labour MP Jamie Reed, who told emboff privately that the government could call elections as early as spring of 2009, and would unlikely wait until the term ends in 2010. He did give a caveat, stating that election planning remained in flux, and noting that discussions on timing were ongoing.
Consensus For Now - But The Gauntlet Is Laid Down
7. (C/NF) The Tories have expressed support for the bail-out package, acknowledging that there was no other option when faced with the collapse of the banking system. “Now was the time for all political leaders to be bi-partisan,” stated Barker, and “the Tories have told the PM he has their support for the financial measures recently announced.” However, when the dust settles, he argued, it will be time to take a hard look at how “we got to this position, how do we get through the crisis stronger and better, and what can we achieve realistically in the longer-run?” The Labour Party is particularly vulnerable on the first part of that question, he contended, and pointed to improper regulatory oversight among the many perceived failings of the Labour government. He added that the challenge for everyone, now and in the immediate future, is to determine the right strategy for getting through the crisis and then to tackle the real problems brought on, or aggravated by, the crisis: a greater debt burden, collapsed housing prices, higher inflation, greater personal bankruptcies. This “is no moment of triumph for the government - for it is the British people who have now been landed with the bill for the boom that turned to bust,” recently remarked George Osborne, Shadow Chancellor.
8. (C) Reaction in London to the U.K. economic rescue plan has been more muted than expected, with the stock market down nearly 3 percent in trading the morning of October 15th. Skepticism remains whether the measures adopted will be
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sufficient to unlock paralyzed inter-bank lending and to start restoring credit in the faltering financial system. The U.K. government and investors are also watching closely the U.S. response to the crisis and the effect of the U.S. plan on both Wall Street and Main Street. U.K. officials have little room to maneuver should the rescue plan prove to be inadequate, since they have adopted measures that were to be called upon only in extremis. A worsening of the crisis would be bad news for the PM, who is enjoying a brief respite from the bashing he has received regularly in the press. While Labour’s poll numbers are slightly up, the Tories would still win a majority if the elections were held today.
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