VZCZCXRO4296
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #1574/01 2320541
ZNR UUUUU ZZH
P 200541Z AUG 07
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 9048
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 02 BERLIN 001574
SIPDIS
SENSITIVE
SIPDIS
TREASURY PASS TO FEDERAL RESERVE
E.O. 12356: N/A
TAGS: EFIN PREL PGOV GM
SUBJECT: U.S. SUBPRIME MARKET FALLOUT REVERBERATES IN
GERMANY
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION
1. (SBU) SUMMARY. Fall out from the U.S. subprime mortgage
market continues to reverberate in Germany. IKB, a
Dusseldorf based bank, has chalked up losses of
approximately 3 billion euros ($4.1 billion), staving off
insolvency due to a bailout of 3.5 billion euros ($4.79
billion) led by state-owned KFW. Contacts at IKB believe
that banking losses will lead to more regulation by the
German government. The ECB responded to the crisis by
pumping more than two hundred billion euros into European
financial markets, but remains sanguine that market
disruptions are temporary. Contacts within the German
government agree the fundamentals of the U.S. and global
financial system remain strong. They support the USG's
call for calm and the need to ensure liquidity in global
markets. Contacts at the Chancellery, while supportive of
U.S. policy in general, question whether such crises could
be avoided in the future with stronger regulation of hedge
funds. The Finance Ministry believes policymakers should
work to stabilize markets and determine the root causes
only after the crisis has passed. In contrast, Economic
Ministry officials are concerned about the impact of a
major market downturn on the German economy as a whole.
END SUMMARY
IKB
- -
2. (SBU) The German bank most affected by the fallout of
the U.S. subprime market is Duesseldorf-based IKB Deutsche
Industriebank AG. The bank invested a total of 7.8 billion
euros ($10.68 billion) in risky subprime mortgages. Its
estimated total losses are approximately 3 billion euros
($4.1 billion). Traditionally, a steep loss like this
would have meant bankruptcy for the bank, and might have
sparked a deeper financial crisis. To avoid this, KFW, a
state-owned lender, and other German banks offered a 3.5
billion euro ($4.79 billion) bail out, with guarantees
totalling 8.3 billion euros ($11.37 billion).
3. (SBU) German Federal Financial Supervisory Authority
(BaFin) auditors are reviewing IKB books and are expected
to issue a detailed report on the extent of losses by the
end of August. IKB expects a broad political debate in the
Bundestag and at the state level about KFW's intervention
and whether new regulations are necessary to avoid future
crises.
4. (SBU) On August 15, CG Dusseldorf spoke with Clemens
Jahn, the head of IKB Private Equity, a subsidiary of IKB.
According to Jahn, other affected banks in North-Rhine
Westphalia are WestLB, Postbank, and Sal Oppenheim. All
banks in Germany are being hit in one way or another, at
least in terms of the general level of trust in the
financial system - and thus their willingness to lend to
each other. It is too early to tell if there are more
serious problems waiting to be discovered. Jahn believes
the bank will survive the crisis. However, if loses at
IKB are higher than 3 billion euros, pressue will build
for a political debate over the appopriateness of spending
more KFW money to cover urther losses.
5. (SBU) IKB expects the crisis ill result in more
regulation for the German finncial industry. The bank
believes BaFin will tak measures to enhance transparency,
such as requiing off-balance-sheet activities to be listed
onfinancial institutions' balance sheets. These
regulations will be on top of those already in place and,
IKB argues, will impose a further burden on smaller banks
such as itself. IKB does not believe more regulation is
the answer, however, as regulators usually respond to the
last crisis and are notoriously bad at anticipating new
movements in the financial sector.
THE ECB STEPS IN
- - - - - - - - -
6. (SBU) The Frankfurt-based European Central Bank (ECB)
has taken strong action to limit the extent of the fallout
on European markets by injecting over two hundred billion
euros into financial markets to ensure liquidity. On
August 15, CG Frankfurt met with Francesco Papadia,
Director General for Market Operations at the European
Central Bank, to discuss the subprime crisis. Papadia
described the current situation as "close to normal," and
said that the situation was probably a needed correction to
the recent "Panglossian days." The ECB would prefer not to
BERLIN 00001574 002 OF 002
keep injecting liquidity in the market, but would do
whatever is necessary to stabilize the market. He added
that technically there is no limit to ECB infusions.
7. (SBU) Papadia said that banks probably overreacted to
the liquidity crisis. He felt a certain amount of the
demand was based on panic, as evinced by the precipitous
decline in liquidity at the beginning of the crisis. He
described this situation as a market inefficiency that the
ECB had to help alleviate. Papadia believes that any
structural problems that contributed to the crisis were in
the U.S. fund rating system and mortgage market and
therefore not European in origin.
THE VIEW FROM THE CHANCELLERY
- - - - - - - - - - - - - - -
8. (SBU) On August 17, EconOff met with Ludger Schlief,
Head of the Chancellery's Finance Policy Division, to
discuss the crisis. The Chancellery believes that global
actions taken to stabilize markets and reassure investors
of the overall soundness of the U.S. economy are working.
They support the ECB's move to inject much needed liquidity
into financial markets. The German government however, is
concerned that problems in the subprime market could lead
to a crisis in confidence in the U.S. economy that could
spread to Europe. For that reason, Schlief said that it is
important for major economies to work together to
coordinate responses to send a clear message to the
markets.
9. (SBU) The Chancellery also raised the issue of the
underlying causes of the crisis. Returning to a theme
often raised by the Chancellor during Germany's G-8
presidency, Schlief speculated that requiring more
regulation of hedge funds could be one way to ensure
transparency and avoid further such crises.
THE FINANCE MINISTRY
- - - - - - - - - - -
10. (SBU) Dr. Thorsten Poetzsch, Deputy Director General
for Banking and Finance Issues at the Ministry of Finance,
expressed confidence that international markets will
survive the current volatility with no long term impact.
Poetzsch said it is important to ensure the problems in the
subprime market do not spread to other sectors. He added,
however, that it is too early to speculate on the impact of
the crisis on German policy and financial regulations. At
this stage the most important task for governments is to
contain the crisis and restore confidence in global
financial markets.
THE ECONOMIC MINISTRY
- - - - - - - - - - -
11. (SBU) Dr. Albert Caspers, Head of the Macroeconomic
Division of the Ministry of Economics, echoed the opinion
of the Chancellery and Finance Ministry. He is satisfied
that everything is being done to stabilize markets and
ensure confidence. The Economic Ministry believes the U.S.
and German economies are fundamentally strong and can
weather this crisis. Caspers noted that the German economy
is in the midst of a robust upswing and believes the crisis
should have no immediate impact. However, he did express
concern over the danger to the German economy of a global
slowdown.
11. This cable was coordinated with consul generals
Dusseldorf and Frankfurt.
KOENIG