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DE RUEHRL #1389/01 2880542
ZNR UUUUU ZZH
P 140542Z OCT 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2356
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 02 BERLIN 001389
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EFIN ECON GM
SUBJECT: THE VIEW FROM BERLIN: NO EUROPE-WIDE BAILOUT BUT
COORDINATION ONGOING
1. (SBU) SUMMARY. In a meeting with Deputy Secretary of the
Treasury Robert Kimmitt on October 9, Thomas de Maiziere, Head of
the Federal Chancellery, signaled the possibility of greater
European coordination following the upcoming EU summit. The
Chancellery is critical of the way the UK and Ireland rolled out
their bank rescue plans. Germany does not intend to pay for a
Europe-wide bailout that might give member states a green light to
offload bad assets. De Maiziere hoped the U.S. rescue plan would
have clear, unequivocal rules to restore market confidence. He
expressed some skepticism of Steinbrueck's recently announced
8-point plan. END SUMMARY.
2. (SBU) Kimmitt reported that U.S. authorities - the Federal
Reserve, Treasury, SEC, other regulators - were coordinating their
actions, but it was now time for greater international coordination.
The G7 and G20 finance minister meetings in Washington this weekend
would be a good occasion to do so. Finance ministers need clear
lines of communication and coordination to guide future
collaboration, where appropriate. They will focus on core principles
for dealing with the current financial turmoil, namely:
-- enhancing liquidity (to be handled by monetary authorities);
-- strengthening financial institutions;
-- preventing market abuse; and,
-- protecting retail savers.
3. (SBU) De Maiziere agreed and added that now was not the time to
diagnose the root causes of the crisis. There would be time for
that later. States need now to rebuild trust and confidence in the
markets, though too much should not be promised to investors, firms
and others. Europe as a whole needs to change its accounting rules
in the next 10 days, when banks' quarterly reports come out, to
bring them in line with U.S. accounting standards. Otherwise,
countries will have to resort to national solutions, while
coordinating with each other.
4. (SBU) In reference to the October 7, 2008 meeting of EU finance
ministers in Luxembourg, De Maiziere noted EU agreement on
supporting banks whose failure could cause systemic risk. Yet
Germany would not "put a bag of money in the middle of Europe for
all to grab" as a way of mitigating risk, he added, as it would give
member states a green light to offload bad assets. Though they
officially welcomed the UK and Irish bank rescue plans, the Germans
are not pleased with the way they were announced. They noted that
Gordon Brown had not mentioned the UK plan to Merkel at the recent
summit in Paris.
5. (SBU) With regard to the Troubled Asset Relief Program (TARP),
Kimmitt indicated that Treasury will likely not be making its first
purchases until November. De Maiziere hoped the $700 billion U.S.
rescue plan would have clear, unequivocal rules to encourage market
confidence. Institutions will need to be looked at again after the
financial crisis has passed, and new international rules should be
considered. There must also be careful preparation for all
multinational meetings addressing the crisis; inconclusive meetings
could actually contribute to a further loss of market confidence.
As this weekend's meetings in Washington were previously scheduled,
he had no such concerns about it.
6. (SBU) In response to a question by De Maiziere, Kimmitt informed
him that the SEC's ban on short-selling expired on October 8. He
also explained that the SEC did not change accounting rules, as some
recently alleged. Rather, the regulatory agency clarified existing
rules with regard to classification, noting existing flexibility.
7. (SBU) Kimmitt praised the Transatlantic Economic Council (TEC),
created under the Germany EU Presidency, and highlighted the
important role it had played in bringing U.S. and European
accounting standards closer together. He saw the TEC as the single
most important transatlantic economic initiative in years, and hoped
the Germans would encourage other Europeans to continue supporting
it. De Maiziere pledged that Germany would do so, but was unable to
confirm whether Germany would play a major role in sustaining the
TEC.
8. (SBU) Some have characterized Germany as pro-regulation and the
U.S. anti-regulation, said Kimmitt. In fact, the distinction was
simplistic. Analysis in the U.S. shows that no market participants
- mortgage originators, banks, credit rating agencies, regulators,
or investors - performed well prior to the financial crisis. The
crisis started in the most regulated part of the U.S. financial
services sector: banks (and not hedge funds). More regulation in
the future may be needed, he suggested, but it should be designed in
a way that does not stifle innovation.
BERLIN 00001389 002 OF 002
9. (SBU) Kimmitt said that U.S. authorities are often unsure of how
to coordinate with Europe, whether via EU institutions, bilaterally
or otherwise. De Maiziere acknowledged the diversity of key
European actors - ECB Chief Jean-Claude Trichet, Luxembourg's Prime
Minister Jean-Claude Juncker, French President Nicolas Sarkozy,
various EU Commissioners - but noted the EU could have more unity
following the upcoming, previously scheduled, EU Summit. Commenting
on Steinbrueck's recent 8-point proposal for financial market rules,
Kimmitt hoped there would not be too many different plans with too
many points. Some of Steinbrueck's points were in line with U.S.
thinking, but others could wait until after the current fire had
been put out. De Maiziere mildly criticized Steinbrueck's plan,
noting it did not indicate priorities, and contained elements that
were short-term and long-term, institutional and personal. He was
not certain whether Germany had raised it with the EU yet.
10. (SBU) Kimmitt felt the G20 was an appropriate group to work with
on the crisis, especially since it would reveal Chinese, as well as
Japanese, perspectives. Kimmitt characterized U.S.-Asia interaction
on the financial crisis to this point as constructive, though more
"tactical and operational" than "strategic and philosophical." The
U.S. has been working with Asian countries to ensure they had
information they needed to reach decisions, including the continued
purchase of sovereign debt following the federal takeover of Fannie
Mae and Freddie Mac.
11. (SBU) Kimmitt raised the danger the financial crisis posed to
fragile emerging economies such as Ukraine and Pakistan. Pakistan
currently has less than two months of import cover. A collapse of
the Pakistani economy could lead to unrest and play into the hands
of the Taliban. This could cause additional security concerns for
U.S. and German troops in Afghanistan. Pakistan needs an IMF
package; the World Bank is also prepared to help, and the Asian
Development Bank has already pitched in. Although President Zadari
seems to understand this, it is politically difficult for Pakistani
leaders to be seen bowing to pressure from the IMF or western
governments. Kimmitt commented that he saw an active future for the
IMF, but further reform is need to ensure that big emerging
economies like Brazil and India are engaged.
12. (SBU) In response to a question by De Maiziere, Kimmitt noted
that in times of economic turmoil, investors often put their money
in industrial countries' bonds or in commodities like gold, but were
less inclined to do so with oil, whose price is particularly
sensitive to supply and demand forces, and hence volatile. Despite
their huge Sovereign Wealth Funds, countries like Kuwait and Saudi
Arabia are struggling to keep up services in the context of falling
oil prices, and are reported to be considering repatriation of funds
invested abroad in order to do so.
13. (SBU) Kimmitt said the U.S. appreciated Germany's support on
implementing UN Security Council resolution 1803 on Iran,
particularly by designating Bank Melli. Western countries need to
make sure Iran does not have the opportunity to illegally transfer
funds for its weapons program while all eyes are averted by the
financial crisis. Strong action within the EU supports the argument
in favor of multilateral action as opposed to Congressional
proposals that would force foreign companies to choose between
trading with the U.S. or with Iran. He also referenced recent
proposals by the U.S., French and British, respectively:
-- Expanding sanctions on financial services to include insurance;
-- Tightening export controls within the EU on oil refining
technology; and
-- Tightening export controls within the EU on liquefied natural gas
technology.
14. (SBU) Kimmitt remarked that Russian and Chinese banks were
honoring Security Council resolutions against Iran, despite their
government's political rhetoric. He added that years ago, U.S.
sanctions against the Soviet Union often had a more negative impact
on the transatlantic relationship than on the Soviets because of the
unilateral nature of extraterritorial sanctions. Hence, today's
sanctions are targeted and multilateral.
KOENIG