VZCZCXRO9024
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #0341/01 0351159
ZNR UUUUU ZZH
R 041159Z FEB 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC 7250
RUEHKO/AMEMBASSY TOKYO 1109
RUEHOT/AMEMBASSY OTTAWA 1114
RUEHMO/AMEMBASSY MOSCOW 2544
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 LONDON 000341
SIPDIS
SENSITIVE
SIPDIS
TREASURY ALSO FOR A/S CLAY LOWERY
E.O. 12958: N/A
TAGS: ECON EFIN EU UK
SUBJECT: PM BROWN HOSTS SUMMIT: PROPOSALS FOR STABILITY IN
GLOBAL FINANCIAL MARKETS
REF: LONDON 00116
LONDON 00000341 001.2 OF 003
SUMMARY:
1. (SBU) Summary. On January 29, UK Prime Minister Brown,
together with German President Merkel, French President
Sarkozy, Italian PM Prodi, and EU President Barroso, issued
a joint communiqu proposing steps to enhance transparency
and promote stability in the global financial markets. The
leaders said that the European economy remains
fundamentally strong and reaffirmed their commitment to an
open global economy. They stressed the need for private
sector solutions backed by regulation to enhance
transparency in the financial sector; to finish and
implement the crisis management work of the EU and
Financial Stability Forum (FSF); and to seek a new role for
the International Monetary Fund to oversee global macro
financial stability (see para 7 for key excerpts).
According to a contact in the Cabinet Officer, there was
complete agreement on the communiqu; the leaders asked
Brown to lead on these issues at the July G8 Summit and
Brown agreed to support EU membership in the FSF. End
Summary.
2. (U) At the October 2007 Lisbon EU Summit, Brown, Merkel
and Sarkozy signed an ad hoc trilateral statement regarding
financial market developments and agreed to meet to discuss
how they might steer the work of the EU regarding long term
decisions to ensure economic stability. The meeting took
place on January 29; participation was expanded to include
Italy and the EU, see reftel. Brown read the communiqu at
a press conference following the meeting at which each
leader took a question from the press.
3. (SBU) Simon Girdlestone, ECOFIN Desk Officer, European
Secretariat at the Cabinet Office told Econoff on January
SIPDIS
30 that there was complete agreement on the communiqu,
which was not changed from the initial draft. Girdlestone
said that there were no divergent views expressed regarding
either the need for added regulation or the need to resist
protectionism. He also confirmed that Brown agreed to
support EU membership in the FSF.
4. (SBU) It was surprising that the five leaders were in
such complete agreement on the issues discussed that there
were no changes to the draft communiqu, Girdlestone added.
At the press conference, each leader answered a single
question from a member of their press corps. In his
remarks, Barroso also referred to the EUQs future
participation in the FSF. HM Treasury contacts had
previously noted to Econoff that the UK felt it would be
helpful to have the EU as a member of the FSF, but that the
UK would not propose EU membership. Consistent with this
view, Girdlestone confirmed that Brown said at the summit
the UK would support EU membership.
5. (SBU) Girdlestone said that PM Brown had been tasked
with raising the issues in the communiqu at the July G8
Summit in Japan.
6. (SBU) The communiqu reference to an agreement on the
Doha round being essential to an open global economy
reflected the view of all five leaders, according to
Girdlestone.
The Communiqu
7. (SBU) Relevant excerpts below. See full text of
communiqu at
http://www.number10.gov.uk/output/Page14443.a sp
Begin excerpts of joint communiqu:
WORLD ECONOMY
The fundamentals of the European economies remain strong
with employment still rising. They are thus well placed to
face the challenges presented by heightened global
uncertainty. As the leaders of the major European economies
we remain committed to cooperating closely to maintain
economic stability, and to strengthening and deepening
economic reform. At this time of global uncertainty we need
to signal our commitment to an open global economy. An
ambitious and balanced agreement on the Doha round, to
LONDON 00000341 002.2 OF 003
which we are committed, is essential to this.
FINANCIAL MARKETS
We look forward to discussing the outcome of the work
currently underway in the Financial Stability Forum, and to
discussing at the Spring European Council Ecofin's work to
examine the causes and proper response to recent financial
market turbulence.
In developing a longer term response we should be guided by
three principles:
-First, primary responsibility for managing risk is and
must remain with individual financial institutions and
investors.
-Second, this needs to be backed up by strengthened
national regulatory and supervisory frameworks.
-Third, regulatory authorities in different countries need
to cooperate and exchange information effectively in the EU
and internationally to prevent and manage crises and
contagion.
More immediately, however, we must rebuild confidence and
increase the transparency of financial markets,
institutions, and the instruments they trade by: improving
the quality of the information available to investors on
structured products, including in relation to their
valuation; enhancing the understanding and management of
risk; and avoiding possible conflicts of interest.
To this end we call for:
-improvements in the information content of credit ratings
to increase investors' understanding of the risks
associated with structured products, and for action to
address potential conflicts of interest for rating
agencies. While preferring market-led solutions, such as
the amendment of the IOSCO code of conduct, if market
participants prove unable or unwilling to rapidly address
these issues we stand ready to consider regulatory
alternatives;
-improvements in the understanding of banks' and other
financial institutions' exposure to off balance sheet
vehicles. We call upon the major audit firms and
supervisors to deliver clear and consistent guidance on
valuation and disclosure of such risks; and
-prompt and full disclosure of losses banks and other
financial institutions that would help reduce uncertainty
and improve confidence in financial markets;
-improvements in EU early warning on financial stability
through regular reporting from the Level 3 committees
(CEBS, CEIOPS and CESR);
-market participants, the FSF and the EU to act rapidly to
ensure adequate transparency and disclosure about how
structured products are valued, that uncertainties around
those valuations are clear and that risks are well managed
The Basel Committee of Banking Supervisors should bring
forward standards on improving the international management
of liquidity risk. Additionally, we need to improve
dialogue between supervisors and firms about risk
management and stress testing.
Market orientated solutions are crucial to achieving the
necessary improvements in business operations and in
interactions between market participants. We therefore
welcome the voluntary best practice standards presented by
the London-formed Hedge Fund Working Group on 23 January
2008 in the context of the Financial Stability Forum's five
recommendations on hedge funds.
INTERNATIONAL AND EU COOPERATION
It is also important to ensure the work already underway in
the Financial Stability Forum and the EU to improve crisis
prevention and management is concluded and implemented as
soon as possible. This should include:
LONDON 00000341 003 OF 003
-measures to foster the effectiveness of EU networks of
financial supervisors and to ensure strong and effective
supervision of cross border groups;
-common principles for international financial crisis
management;
-a common analytical framework for the assessment of the
systemic implications of a potential crisis;
-common practical guidelines for crisis management,
including improved information exchange; and
-closer cooperation between countries with particularly
important links at firm or capital market level.
REFORM OF THE INTERNATIONAL INSTITUTIONS
We need a better early warning system for the global
economy and we need to ensure that its warnings have the
force and authority to ensure that they are acted upon. To
this end:
-in the short term the IMF and Financial Stability Forum
need to report at the next IMF meetings on the threats to
the global economy from financial sector developments. This
will improve transparency about risks in the financial
sector and how markets and regulators are responding. The
IMF and FSF should also present as soon as possible
proposals on how they will further enhance their
cooperation.
-in the longer term we should consider how to strengthen
and clarify the IMF's responsibility to oversee macro
financial stability.
END Excerpts
TUTTLE