VZCZCXRO9159
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRL #1414/01 2940556
ZNR UUUUU ZZH
P 200556Z OCT 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2398
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 001414 
 
SENSITIVE 
 
STATE FOR DRL/ILCSR AND EUR/AGS 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB GM
 
SUBJECT: GERMAN FINANCIAL BAILOUT APPROVED 
 
REF: FRANKFURT 003102 
 
¶1.  SUMMARY.  Despite concerns raised by some of Germany's states 
regarding the division of cost between the federal and state 
government, the German Parliament today approved legislation to 
shore up the country's ailing financial system.  Business leaders 
and economists applauded the development.  Chancellor Merkel, who 
had brokered a compromise deal with the states to ensure the 
legislation's approval, spoke of the need for a "new 
financial-market constitution."  She also continued to emphasize the 
importance of a stronger oversight role for the IMF, improved 
credit-rating agencies, and less risk with greater transparency in 
financial products.  The outlook for the real economy looks 
increasingly more worrisome; the German government cut its 2009 
growth forecast from 1.2 to 0.2 percent this week and most leading 
economists believe Germany is sliding into recession. 
 
FINANCIAL BAILOUT APPROVED BY PARLIAMENT 
---------------------------------------- 
 
¶2.  The German Parliament today overwhelmingly approved legislation 
to shore up the country's ailing financial system.  The vote in the 
Bundestag (House of Representatives) was 476 in favor, 99 against. 
The Greens and Left Party opposed the plan.  The Bundesrat (the 
Federal Council, representing state governments) backed the plan 
unanimously, and President Horst Koehler signed it into law.  The 
legislation will take effect 8:30 am on Monday, October 20, before 
the opening of trading on the Frankfurt Stock Exchange, which begins 
at 9:00 am. 
 
¶3.  As reported in reftel, the so-called Financial Market 
Stabilization Fund authorizes the government to guarantee 400 
billion euros ($544 billion) in loans between banks, channel up to 
80 billion euros ($109 billion) for capital injections and spend an 
undisclosed amount to buy up toxic assets.  In return, the 
government will collect fees on guarantees and assume discretionary 
powers in the institutions that it funds directly. 
 
¶4.  There had been concerns the legislation would founder due to 
opposition by the states (Lander).  State leaders, led by the 
Bavarians, complained of the high cost associated with contributing 
to a federal rescue plan while covering their own regional banks' 
bad debt.  Following negotiations with Chancellor Merkel on October 
16, a compromise was reached whereby the states would shoulder 35 
percent of the federal rescue plan's costs, but not exceed a ceiling 
of 7.7 billion euros. 
 
BUSINESS LEADERS AND ECONOMISTS REACT POSITIVELY 
--------------------------------------------- --- 
 
¶5.  German business leaders and leading economists applauded the 
German rescue package and efforts to coordinate with other European 
countries.  The Association of German Banks (BdB) said the plan was 
an important step to remove liquidity bottlenecks in the inter-bank 
market, strengthen banks' capital base and create confidence in 
general.  The Federation of German Employers' Associations (BDA) and 
the Association of German Chambers of Industry and Commerce (DIHK) 
welcomed the package of measures adopted by the euro-zone countries 
as an "absolutely imperative step" to end the financial crisis.  The 
president of the German Institute for Economic Research (DIW), Klaus 
Zimmermann, defended the public guarantee package to recapitalize 
banks as an emergency solution, calling for internationally 
coordinated reforms and a European financial supervision authority. 
The Frankfurt DAX rose on news of the plan's approval. 
 
¶6.  The CEO of Deutsche Bank, Josef Ackermann, along his colleagues 
on Deutsche Bank's board of management, announced they would forego 
50 percent of their salaries in light of the financial crisis. 
Ackermann also said his bank would not require government assistance 
in the financial crisis. 
 
ECONOMIC OUTLOOK: MOSTLY CLOUDY 
------------------------------- 
 
¶7.  Some optimists in Germany posit the peculiarities of the small- 
and medium-sized enterprises known as the "Mittelstand" may 
partially shield the German economy from the financial crisis. 
Mittelstand firms have annual sales of below 50 million euros and 
employ less than 500 people.  These firms comprise 99.7 percent of 
all German companies, and employ over 70 percent of the private 
sector workforce.  They are responsible for over 47 percent of total 
output.  Unlike Germany's large multinational companies, Mittelstand 
firms do not generally borrow from the large private and state-owned 
 
BERLIN 00001414  002 OF 002 
 
 
regional banks that have been most affected by the financial crisis. 
 Only 2 percent of the 4000 Mittelstand firms that requested credit 
were denied by their local "house" banks, according to a study 
released early October by Creditreform economic research group. 
Some believe that as a result, tightening credit markets will have 
less of a direct impact on this important element of the German 
economy, and by extension, on the German economy as a whole. 
 
¶8.  Most economists, however, see a bleaker picture.  In their joint 
economic forecast for autumn 2008, six leading economic institutions 
said the German economy was on the brink of recession.  They praised 
the German government's rescue package to shore up the German 
banking sector, however.  The institutions also predicted that "if 
it is possible for the banking sector to stabilize in the coming 
months, by mid-2009 the global economy should gradually recover." 
Meanwhile, the German government cut its 2009 growth forecast from 
1.2 to 0.2 percent.  Growth predictions for 2008 remain unchanged at 
1.7 percent. 
 
GOVERNMENT CHARTS THE WAY FORWARD 
--------------------------------- 
 
¶9.  Chancellor Angela Merkel emphasized on October 16 the preeminent 
role of the state in reestablishing confidence among banks "in order 
to protect citizens, not to protect the banks' interests."  The 
rescue package was a first step to stabilize the financial system, 
she said; it will involve limits on compensation and state influence 
on management decisions.  Merkel added that the second "building 
block for a new financial-market constitution" will require a 
stronger oversight role for the International Monetary Fund, 
improved credit-rating companies and less risk with greater 
transparency in financial products.  Merkel also predicted European 
accounting rules with regard to "mark-to-market" valuations will be 
brought into line with U.S. standards by next Wednesday. 
 
¶10.  Despite recent comments by Economics Minister Michael Glos that 
the government should move up tax cuts planned for 2010 by a year, 
an economic stimulus package to spur growth does not appear 
imminent.  Foreign Minister Frank-Walter Steinmeier said this week 
the question is "not ready to be decided."  Finance Minister Peer 
Steinbrueck clearly opposes a stimulus, as it would complicate his 
goal of balancing the federal budget by 2011. 
 
KOENIG