VZCZCXRO3134
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHFR #4109/01 2741046
ZNY CCCCC ZZH
R 011046Z OCT 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0558
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RHEHNSC/NSC WASHINGTON DC
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 PARIS 004109 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958:  DECL:09/18/17 
TAGS: EFIN ECON PREL FR
SUBJECT: PAULSON DISCUSSES FINANCIAL MARKETS, IRAN WITH SARKOZY, 
LAGARDE 
 
Classified by EMIN Seth Winnick for reasons 1.4 (b) and (d) 
 
¶1. (C) Summary: In successive meetings Treasury Secretary Hank 
Paulson told Minister of Finance Christine Lagarde and President 
Nicolas Sarkozy that it was important not to overreact to 
financial market turbulence.  Sarkozy asked for U.S. support for 
Dominique Strauss-Kahn's candidacy for IMF Managing Director. 
Discussions also touched on continued cooperation on Iran, 
Sarkozy's reform agenda and China.  End summary. 
 
¶2. (C) During a September 17 visit to France, Treasury Secretary 
Paulson and accompanying delegation met with Sarkozy and 
Lagarde, and lunched with leading representatives of France's 
business community.  Sarkozy made a strong push for public U.S. 
support for Dominique Strauss-Kahn's candidacy for Managing 
Director of the IMF. Calling Strauss-Kahn the "smartest 
socialist," Sarkozy said it was important not to encourage 
President Putin by entertaining the candidacy Czech Josef 
Tosovksy, who has KGB ties. 
 
¶3. (C) In response to Secretary Paulson's urging that France's 
business and financial sectors reduce exposure to Iran, Sarkozy 
said the United States could count on French cooperation in 
toughening sanctions.  "There will be no double talk from 
France. Stopping the bomb is more important than business 
contracts."  But Sarkozy said unilateral legislation under 
consideration in the U.S. Congress would be a "disaster" and 
make the Iranians "very happy."  Sarkozy's diplomatic advisor 
Jean-David Levitte noted that France would look to work, if 
necessary, outside the Security Council, notably with EU 
partners, on further measures against Iran. 
 
¶4. (C) On sub-prime-related market turbulence, Sarkozy said 
regulation was needed to forestall such events and minimize 
impact on global economic growth.  Paulson underscored the 
importance of not over-reacting.  It would take months, not 
weeks, for credit to be re-priced, but this was "not a major 
crisis."  Several issues were coming into focus: conduits and 
other off-balance sheet funding vehicles had been a surprise; in 
the U.S. there was a need to look at mortgage origination, as 
well as the role of regulatory supervision and rating agencies. 
Asked for his views on French banks, Paulson said they had 
strong balance sheets and were profitable, though they, too, 
might have challenging off-balance sheet obligations.  Paulson 
said the German Landesbanken were "the biggest problem," though 
they presented little systemic risk and would be bailed out by 
the German taxpayer. 
 
¶5. (C) Sarkozy asked for views on U.S. exchange rate policy. 
Paulson said the United States supported a strong dollar. 
Exchange rates ultimately were market-driven and the U.S. would 
pursue policies that increased confidence in the U.S. economy. 
In an exchange on China, Paulson said the U.S. message to China 
was that if it wanted to be a "member of the club," it needed to 
adhere to global norms on issues such as Sudan, Iran as well as 
market-determined exchange rates.  The real concern was not that 
China's economy would pass that of the United States, but that 
China would reform too slowly and ultimately run into problems. 
Paulson asked Sarkozy to "make a big impact" in China by 
carrying a similar message. 
 
¶6. (C) In a brief exchange on trade issues, Sarkozy said France 
was not afraid of globalization, but would insist on reciprocity 
in its foreign relations.  Sarkozy was not shocked that the 
United States defended its farmers: "we're doing the same." 
Paulson pushed Sarkozy to help "drive Doha to a conclusion." 
Sarkozy would "do (his) best," butQould not support a deal that 
was not fair to France. 
 
Lagarde on Economic Reform, China and Financial Markets 
- - - - - - - - - - - - - - - - - - - 
 
¶7. (C) Finance Minister Lagarde sketched out GOF reform 
priorities, saying the real focus would be on France's social 
programs and associated costs.  Reform of the so-called "special 
pension regimes" for certain categories of public workers 
(including rail workers) was high on the agenda.  The GOF wanted 
to bring such pensions in line with those of other public sector 
employees.  Lagarde acknowledged that the issue had brought down 
the Juppe government in the mid 1990s, but said the GOF would be 
tough on pension reform.  Product market reform - including 
changes to distribution and retail sectors - was also in the 
offing. 
 
¶8. (C) Touching on issues subsequently raised by Sarkozy, 
Lagarde said the GOF wanted strong cooperation on Iran.  She 
suggested an informal U.S. Treasury - Ministry of Finance "task 
force" be created to look at Iran-related banking issues. 
Paulson noted that BNP-Paribas had suspended work in Iran, but 
that Natixis had become more active.  Beyond the financial 
 
PARIS 00004109  002 OF 002 
 
 
sector, it would be important to look at the role of industrial 
companies in Iran, Paulson said.  Although France's exports to 
Iran were a small percentage of its overall exports, they 
represented 8% of Iran's imports.  French Treasury director 
Xavier Musca underscored the importance of the U.S. consulting 
with the GOF before engaging directly with French banks on Iran. 
 
¶9. (C) Lagarde and Musca worried about China's (as well as the 
UAE's) role as financier for Iran, as well as its undermining of 
good governance efforts in Africa with easy money.  More 
generally, Lagarde said the weakness of the yuan was "hurting 
our economies."  The 9/14 informal Ecofin meeting in Porto saw 
agreement to add exchange rate issues to the EU - China summit 
agenda in November.  Lagarde suggested that Brazil and South 
Africa be brought in on the issue.  Paulson said the U.S. was 
pushing for reform and financial market opening in China, and 
"this would help all investors."  He agreed to raise yuan 
exchange rate issue with RSA Finance Minister Trevor Manuel in 
the context of the November G-20 finance ministers meeting. 
 
¶10. (C) On financial market issues, Lagarde said the large 
French banks were strong, with minimal exposure to asset-backed 
securities.  She was "fairly confident" that the smaller banks 
were also well-positioned.  Market transparency and related 
issues had been discussed in Porto, and would be the subject of 
ongoing consultations within the EU.  Paulson said the 
President's Working Group on Financial Markets was looking at 
similar issues, including conduits and off-balance-sheet items 
of regulated institutions.  But it was important to guard 
against overreaction.  In particular Paulson said he sensed that 
Europe was "obsessed" with hedge funds.  Though the link to 
regulated institutions (via bank lending) was an important 
issue, it was hard to blame hedge funds for current market 
turbulence.  Asked about sovereign wealth funds, Lagarde saidQ 
the issue was not as big a deal in France as it was in Germany. 
 
¶11. (U) The Paulson delegation has cleared this cable. 
 
STAPLETON