VZCZCXRO3590
OO RUEHAG RUEHDF RUEHLZ
DE RUEHFT #0239/01 0231309
ZNR UUUUU ZZH
O 231309Z JAN 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9407
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 FRANKFURT 000239 
 
STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND 
EUR/AGS 
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES),OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT: State Steps in to Ensure Bank Consolidation in Germany 
 
Ref: 08 Frankfurt 2735 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
¶1.  Summary: Both Deutsche Bank and Commerzbank are speeding up 
efforts to complete takeovers despite deteriorating balance sheets 
and losses in the fourth quarter.  Finance Minister Steinbrueck has 
taken a firm position in favor of consolidation, stepping in to 
assure that the deals go through in the hope of warding off bank 
failures.  In both merger cases the state will assume ownership 
stakes in the new entities, ultimately putting tax payer money on 
the line if share prices do not recover.  Steinbrueck and his 
colleagues in the Grand Coalition also seem motivated to create 
larger financial institutions that can help the German economy stay 
competitive globally.  End Summary. 
 
Commerz and Deutsche Restructure Takeover Deals 
--------------------------------------------- -- 
 
¶2.  Commerzbank, Germany's second largest bank, received an 
additional 10 billion euro ($12.9 billion) capital injection January 
8, giving the German state a 25% stake in the bank.  Coming on top 
of the 8.2 billion euro ($9.84 billion) injection received two 
months ago, the capital enabled Commerzbank to complete its takeover 
of Dresdner Bank last week.  Minister of Economics Michael Glos 
(CSU) denied that the aid constituted a nationalization, maintaining 
that the government will sell back its shares when their value 
increases, but for now the government will have two seats on the 
supervisory board.  (Note: Commerzbank had renegotiated the purchase 
from Allianz in November, speeding up the takeover, but paying more 
in shares and less in cash, thereby lowering the overall sale price. 
 Commerzbank has since announced it lost money in the fourth quarter 
of 2008.)  In a recent speech, CEO Martin Blessing defended the 
takeover arguing that he had not expected a further deterioration of 
the financial markets when the original deal was announced in 
August. 
 
¶3.  It is also expected that Germany's largest bank, Deutsche Bank, 
will restructure its deal to purchase 30% of Postbank from Deutsche 
Post, also offering shares instead of capital and lowering the sale 
price.  If the deal goes through, Deutsche Post could own as much as 
8% of Deutsche Bank, making the state, which partly owns Deutsche 
Post, an indirect owner of Deutsche Bank.  Deutsche Bank will also 
have the right to purchase a larger share of Postbank within three 
years.  The likely restructuring reflects Deutsche Bank's own 
difficulties coming up with capital after announcing a 4.8 billion 
euro ($6.2 billion) fourth-quarter loss, and an annual loss of 3.9 
billion euros ($5 billion) for 2008. 
 
¶4.  In both cases, the sellers have shown a willingness to accept 
poorer sales conditions in order to keep the deals alive.  The sale 
price of Dresdner and Postbank will end up much lower than 
originally announced, while the shares received in Commerzbank and 
Deutsche Bank as payment continue to plummet.  However, the sellers 
have little choice as banks must hold on to precious capital in an 
environment where a strong capital to assets ratio is the only way 
to maintain investor confidence. 
 
Government Looks to Create Bigger Banks 
--------------------------------------- 
 
¶5.  Finance Minister Peer Steinbrueck has expressed strong support 
for the Commerz-Dresdner deal saying: "I think there is no 
alternative to a bigger concentration of the German banking sector 
as this is needed to remain competitive and fully reap the benefits 
of international capital markets.  The combination of these two 
institutions is clearly in the interest of Germany as a financial 
centre."  Christoph Swonke, an economist at the German Council of 
Economic Experts, explained to Econ Off that Steinbrueck and other 
senior politicians have long wanted to create larger German banks 
that can better help industry and business compete globally and have 
taken advantage of recent turmoil to achieve this goal.  Germany's 
financial landscape is relatively dispersed, with no German bank 
among the world top ten in 2008 as measured by market 
capitalization.  Swonke argued that politicians would not say 
explicitly that they hoped to create "national champions" as that 
term implied a strong role for the state in the economy (which goes 
against both EU and domestic policy positions), but the drive for 
mergers was in effect this phenomenon in all but name. 
 
¶6.  Deutsche Bank Economist Bernhard Speyer echoed the point saying 
that as large international banks like Fortis and Royal Bank of 
Scotland reduce their lending in Germany due to their own 
difficulties, it would be all the more imperative to have large 
domestic banks that could provide funding to both large and small 
enterprises.  (Note: The current credit crisis has hit large 
 
FRANKFURT 00000239  002 OF 002 
 
 
enterprises harder than smaller, as banks are unable or unwilling to 
come up with the significant long-term funding such entities 
require; thus the vitality of large German banks is more critical 
than ever.)  Speaking at a roundtable discussion in Frankfurt 
January 15, European Central Bank board member Juergen Stark 
criticized the German government moves, saying that the state was 
taking on real risks that would fall to the taxpayer should share 
prices not rebound. 
 
Comment 
------- 
 
¶7.  As the credit crisis worsened, Commerzbank's takeover of 
Dresdner became "the right deal at the wrong time" and only state 
intervention kept it from failing.  The government now finds itself 
a part owner of Commerzbank, likely soon of Deutsche Bank, and 
possibly of much maligned Hypo Real Estate if it continues to 
stumble.  In these cases however, Steinbrueck appears to see 
intervention as worth the risk not only to stabilize the financial 
system, but also to bring about the consolidation in the industry 
which he has long supported.  End Comment. 
 
¶8.  This cable was coordinated with Embassy Berlin. 
POWELL