VZCZCXRO4817
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
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