Special Report: Global Financial Crisis

    by Stephen Neale

    LONDON, Dec. 12 (Xinhua) -- A sharp decline in financial investment is more to blame than other factors for Britain's economic woes as the global financial meltdown unfolds, analysts say.

    Britain's economic growth slowed in the first half of 2008, came to a halt in the second quarter and shrank 0.5 percent in the third. If that contraction continues through the fourth quarter, it will mean Britain is already in a recession, the government said.

    Meanwhile, the latest figures released by the Office for National Statistics show that at the end of October, public sector debt was 640.9 billion pounds (about 961 billion U.S. dollars), representing 42.9 percent of the country's GDP (gross domestic product).

    The chancellor's November pre-budget report said UK debt would hit 1 trillion pounds (about 1.5 trillion dollars) over the next few years.

    Those levels have led the International Monetary Fund to say that the British economy is the weakest in the developed world and its recovery period will be lengthy.

    RISE AND FALL OF FINANCIAL CENTER

    Analysts believe the crux of the UK's economic vulnerability lies in London's relatively new status as the world finance center.

    Major events like the 9/11 attacks and the collapse of the Enron Corp. led to tighter security and tougher financial regulations in the United States. That forced many investors to London where rules have been eased by successive governments since Margaret Thatcher and continued during the late 1990s under Prime Minister Tony Blair and his chancellor, Gordon Brown.

    Although studies showed in 2005 that the trading zone from Canary Wharf to The Square Mile accounted for only 7 percent of global funds under management, its importance as an offshore center had been enhanced.

    Billions of pounds were legally held offshore that never appeared on London balance sheets.

    London became the location for 70 percent of the global secondary bond market and almost 50 percent of the derivatives market. It soon dominated foreign-exchange trading and managed almost 80 percent of all European hedge funds.

    Huge overseas companies also were attracted by opportunities to trade more freely, with Citigroup, Lehman Brothers and the Bank of America among with those choosing to expand their operations. They created thousands of jobs for young British professionals in the process.

    But when the financial storm spread, the new world finance center that is most closely linked to Wall Street bore the brunt of the crisis first.

    Global cross-border loans fell by 1.1 trillion U.S. dollars (740 billion pounds) in the first half of the year, while foreign lending by British banks dropped 884 billion U.S. dollars, a 81-percent fall.

    The biggest blow to London, the center of Europe's credit industry, was a drop in the worldwide issuance of bonds and securities. The amount fell 77 percent from more than a trillion U.S. dollars to 247 billion U.S. dollars in the third quarter.

    The reduction reflected the near-total closure of London's capital markets as bonds issued in euros dropped by 94 percent from 466 billion U.S. dollars to 28 billion U.S. dollars over the quarter.

    A lack of financial investment represents a greater threat to Britain than unemployment, weakening demand for consumer goods and even falling house prices, economist Douglas McWilliams told Xinhua.

    "Business investment is a huge part of the economy because it has a good multiplying effect on so many other areas. If it is not there, then it has the opposite effect," said McWilliams, chief executive of the Center for Economics and Business Research.