I always love visiting London. It’s an amazing city with a great vibe and fantastic museums. Like New York, it’s pretty hard to be bored in London.

Yet things are grim at the moment, very grim…

Britain is in the midst of its worst economic contraction since 1992. Sixteen years ago, the United Kingdom exited the ERM, or the European Exchange Rate Mechanism, and devalued the pound by a fifth almost overnight; George Soros infamously made over a billion dollars betting on that outcome and sterling was humiliated along with the Italian lira, which also collapsed.

Prior to July, the pound was surging versus the dollar and, until recently, had traded more than 2 to the dollar – an all-time high. But in the span of just a few months the pound has crashed, plunging more than 25% vis-à-vis the buck at 1.48.

At first glance the City of London seemingly looks busy enough and traffic remains as chaotic as ever in this bustling European capital. But make no mistake about it: London is hurting.

Approximately 6% of the United Kingdom’s GDP, or gross domestic product, is derived from financial services and more than 20% in London alone. It’s a significant statistic that continues to handcuff this great country because, like the United States, the U.K. ran wild in real estate speculation and is now paying the consequences for “bubbles” that were created in many cities, including London.

British banks, like most of those in the United States, are effectively bankrupt. The U.K. government has already nationalized or partially nationalized several banks, including recently, Royal Bank of Scotland.

The Bank of England was late to the interest rate cutting party this year and probably caused the country more harm than good at balking at larger interest rate cuts earlier in 2008. British lending rates now sit at their lowest levels in more than 40 years.

But in one of the most sobering developments in credit markets lately, I notice it now costs more to insure the United Kingdom against bond default than some of its banks, such as HSBC and Lloyds. Credit default swaps, which insure against bond defaults, hit an all-time high last week for several countries, including the U.K., the United States, Germany, France, Italy and Spain.

Like many European nations, the U.K. is now on course to issue a record amount of financing through gilt issuance. When credit markets finally recover and calm down, I expect long-term interest rates for the world’s biggest borrowers in this crisis to rise significantly, including the United Kingdom and, of course, the United States.

Government bonds are enjoying a safe-haven label over the last 16 months; at some point, however, investors will turn this story upside down and demand higher rates as issuance overwhelms the market. The Europeans, including Britain, will issue more than $1.3 trillion dollars in bonds in 2009.

Today I’m visiting several successful British money-managers that have earned more than 20% in profits this year – a remarkable achievement amid the worst calendar year for U.S stocks since 1931 and global equities since 1974. I’ll share their insights tomorrow.