VZCZCXRO7519
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #5173/01 3411025
ZNR UUUUU ZZH
R 071025Z DEC 07
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC 4151
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 FRANKFURT 005173 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
SUBJECT: Frankfurt Stock Exchange: Meeting Global Capital 
Potential? 
 
 
FRANKFURT 00005173  001.2 OF 002 
 
 
¶1. SUMMARY:  The Frankfurt Stock Exchange (FSE) is the world's third 
largest and the sixth by market capitalization.  Known for its 
high-tech trading technology, it has played a lead role in cementing 
Germany's reputation as a financial and economic power.  However in 
an increasingly securitized world, German companies and investors 
have kept their distance from the equity market and Germany has low 
rates of market capitalization and stock ownership for an economy of 
its size.  Not only has Frankfurt failed to keep pace with other 
more globalized financial centers, but the Germany economy also 
remains more self-contained and at a distance from global capital. 
END SUMMARY. 
 
-------------------------------------- 
Germany's Underdeveloped Equity Market 
-------------------------------------- 
 
¶2. Despite having one of the world's largest and most dynamic 
economies, Germany's overall stock market capitalization remains 
only 57% of GDP.  Compared with ratios of 300% in Switzerland, 150% 
in the U.S. and 92% in India, a larger part of the German economy 
still lies outside the stock market.  Financial experts have 
criticized the lack of capitalization, saying that capital remains 
inefficiently allocated and firms lack sources of funding for 
expansion.  In a November 19 speech at the Euro Finance Week 
conference in Frankfurt, Deutsche Bank CEO Josef Ackermann pointed 
out this weakness in the German economy, saying that "a high market 
capitalization is a central factor in the quality of a financial 
center and a national economy." 
 
¶3.  Low-level market capitalization in Germany is primarily a result 
of the business model of the "Mittelstand," Germany's small and 
medium-sized enterprises (SMEs).  Loans from German banks are still 
the most important debt instrument for SMEs, which make up 99% of 
Germany's 3.3 million companies and provide 70% of its jobs.  German 
banks and SMEs have had a historically close, relationship-based 
lending system.  Most loans from regional banks (Landesbanken) 
enjoyed state backing as recently as 2005.  Germany's state 
development bank, Kreditbank fuer Wiederaufbau (KfW), lends and 
provides advice to SMEs and made 15.8 billion euros in commitments 
in 2007. 
 
¶4.  German SMEs have shown a hesitancy to go public in recent years. 
 In 2006, around 3 billion euros were raised in initial public 
offerings (IPOs) in Germany, compared with 17 billion euros in Great 
Britain and 30 billion euros in the U.S.  A November 2007 German 
Stock Institute survey revealed that only 24% of German SMEs were 
considering an IPO in the future.  A full 60% of the firms surveyed 
said other forms of financing sufficed, and 30% feared that going 
public would bring costly regulatory burdens that they cannot 
afford.  Shareholder rights are also strong in Germany meaning that 
once a company goes public it must maintain high, and often costly, 
transparency requirements. 
 
¶5.  Staying private means SMEs face greater challenges in 
strengthening their equity ratio and improving their credit standing 
in the eyes of global investors.  Ackermann argued in his speech 
that "they (equity markets) are indispensable for efficient capital 
allocation and cost-effective enterprise financing."  In relying on 
German bank loans, SMEs remain a step removed for global 
investment. 
 
--------------------------- 
Why Germans Don't Own Stock 
--------------------------- 
 
¶6. Germany also lags behind other large economies in stock ownership 
with only 7% of Germans directly invested in stocks as compared with 
over 20% in Great Britain, the U.S. and Switzerland.  German pension 
funds are also less invested in stocks as their foreign equivalents 
and only 15% of Germans participate in private pension plans.  A 
Deutsche Bank researcher told Econ Specialist November 29 that while 
Germans had a high savings rate of around 11%, the state covers 
large expenses such as higher education and retirement, meaning that 
potential investors do not see the need to "grow money quickly," 
unlike in other countries. 
 
¶7.  Starting in 2009, private German shareholders will pay a capital 
gains tax of 50% when they own less than 1% of a company, a move 
which is unlikely to foster a shareholding culture in Germany.  Such 
a tax already applies for private shareholders who own more than 1%, 
while corporate capital gains are taxed at 25%.  Both the burst of 
the dot-com bubble in 2000-2001 and a similar bust in over-valued 
shares of Deutsche Telekom in 2002 have only cemented the popular 
view in Germany that stocks are a risky venture. 
 
---------------------------------- 
Deutsche Boerse: A Regional Player 
---------------------------------- 
 
FRANKFURT 00005173  002.2 OF 002 
 
 
 
¶8.  Deutsche Boerse AG, which manages the Frankfurt Stock Exchange, 
has attempted to remain competitive with mixed results.  In 1999, 
Deutsche Boerse unveiled the Neuer Markt (New Market), a small 
exchange for start-up and high-tech companies that followed the 
model of the NASDAQ.  Despite initial success, the Neuer Markt 
closed in 2003, a victim of the global dot-com bust.  The Deutsche 
Boerse also failed in its bid to expand by taking over the London 
Stock Exchange in 2004, when its shareholders failed to back the 
move. 
 
¶9.  A notable success for Deutsche Boerse was the launching of the 
high-tech Xetra electronic trading system in 1997, which opened the 
market to more European investors.  Deutsche Boerse introduced the 
Entry Standard in October 2005, whereby smaller companies can list 
themselves while meeting fewer formal requirements.  The FSE has 
cemented itself as a leading exchange market for the Euro zone, but 
clearly does not compete with counterparts such as London, which 
liberalized its equity market as early as the 1980s and took on a 
global role.  A senior AmCham representative told Econ Off November 
1 that Deutsche Boerse retained a focus on the German and European 
economies but "faces a real challenge in that it wants to grow, but 
can find no partners." 
 
¶10. COMMENT:  The German economy looks to remain the outlier among 
the world's large economies in market capitalization and stock 
market participation.  During the current period of economic upswing 
in Germany and global financial unrest, there is little public 
debate about the need to change traditional financing practices. 
While the FSE is certainly not in decline, it remains a regional 
player, leaving global capital investment to other centers.  END 
COMMENT. 
 
¶11.  This cable was coordinated with Embassy Berlin. 
 
POWELL