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Cablegate: Germans Discuss Financial Crisis, Investment

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RUEATRS/DEPT OF TREASURY WASHINGTON DC
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E.O. 12958: N/A
TAGS: EFIN ECON GM
SUBJECT: GERMANS DISCUSS FINANCIAL CRISIS, INVESTMENT
SECURITY AND IRANIAN SANCTIONS WITH DEP SEC KIMMITT

BERLIN 00001399 001.2 OF 002


1. (SBU) SUMMARY. State Secretary Dr. Bernd Pfaffenbach of
the Ministry of Economics told Deputy Secretary of the
Treasury Robert Kimmitt on October 10 that although Germans
are alarmed by the ongoing financial turbulence, the
country is relatively well positioned to ride out the
storm. A fiscal stimulus is unlikely due to a drive to
balance the federal budget by 2011. He expressed concern
that France would again breach the Maastricht Treaty budget
deficit ceiling of 3%. On the new German investment review
law, he said it is not intended to discourage U.S.
investment. Pfaffenbach also suggested that cutting off
all business with Iran might constrain western countries'
ability to pressure the country in the future. END
SUMMARY.

GERMANS INCREASINGLY WORRIED ABOUT ECONOMIC GROWTH
--------------------------------------------- ---

2. (SBU) In Deputy Secretary Kimmitt's October 10 meeting
in Berlin with Economics Ministry State Secretary
Pfaffenbach, Pfaffenbach described Germans as increasingly
"frightened" by the current financial turmoil. He agreed
with Kimmitt that a primary goal of policymakers should be
to restore market confidence and that transparency is key.
Germany's growth, currently forecast at 1.2% this year,
will likely be revised downward. The IMF has already
downgraded its forecasts. Pfaffenbach said Deutsche Bank
CEO Josef Ackermann and others "hiding behind him" favored
a stimulus plan. Finance Minister Steinbrueck, however, is
determined to balance the federal budget by 2011, so a
stimulus is not on the table.


FINANCIAL CRISIS: NEED FOR TRANSPARENCY AND COORDINATION
--------------------------------------------- -------

3. (SBU) Pfaffenbach mused the financial crisis could end
up strengthening the global financial system in the long
term. He conceded the Germans did not at first understand
the possible spillover from the financial turmoil in the
United States. During a visit to New York, Pfaffenbach was
surprised by German bank's lack of understanding about the
sophisticated financial instruments they traded. He also
wondered to what extent Alan Greenspan's policies as
Federal Reserve Chairman were to blame for today's
situation. Pfaffenbach also noted criticism of Merkel's
pledge to guarantee private accounts. On the previous day,
the Czech Finance Minister complained that money was
fleeing countries without such guarantees to those that had
extended them.

4. (SBU) Kimmitt said that open communication and close
coordination are needed, and surprises should be avoided.
The goal of recent interventions is not a government
takeover of the market, but rather to get markets
functioning again. In order to be a more collaborative
partner, Europe needs to develop a set of common principles
to address the crisis. Kimmitt agreed on the need for
transparency, but stressed that new regulation needs to be
smart regulation, which also recognizes the importance of
market forces and discipline.

GERMAN'S PROCLIVITY FOR SAVING IS AN ADVANTAGE
--------------------------------------------- -

5. (SBU) Pfaffenbach said he trusted Secretary Paulson was
trying to get the U.S. response right, but he still felt
the $700 billion U.S. bailout amounted to a "socialization
of losses." He also thought the much-criticized German
banking system, with its system of "Sparkassen" or small
cooperative banks, was probably better able to withstand
the current turmoil. Germans' emphasis on high savings and
lower consumption could also be helpful in the current
environment, adding that "Germans don't buy Porsches on
credit." Pfaffenbach said he was concerned France would
again breach the Maastricht Treaty budget deficit ceiling
of 3%.

GERMAN INVESTMENT SECURITY LAW NOT MEANT TO DISADVANTAGE
U.S. INVESTMENT
--------------------------------------------- -----

6. (SBU) Pfaffenbach reported the new investment review law
was discussed the previous day in the Bundestag, and that
there seemed to be support for it. The proposed law would
allow the government to block an investment if it posed a

BERLIN 00001399 002.2 OF 002


threat to "national security or public order," and if the
foreign investor would own 25% or more of the voting equity
in a German company. Pfaffenbach explained that the law
was not meant to discourage U.S. investment - in fact,
there was an on-going government program to attract more
such investment. Rather it was intended to prevent
companies like Gazprom from taking over the electricity
grid, for example.

IRAN: SOME BUSINESS SHOULD REMAIN/FATF COULD DO BETTER
--------------------------------------------- ------

7. (SBU) Kimmitt said he appreciated Germany's support on
implementing UN Security Council Resolution 1803 on Iran.
Western countries need to make sure Iran does not have the
opportunity to illegally transfer funds for its weapons
program while eyes are averted by the financial crisis.
Kimmitt encouraged Germany to support 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. He thought the Financial
Action Task Force (FATF), at its meeting next week in
Brazil, should send the strong message that Iran will pay a
high price for failing to establish a system to fight money
laundering and terrorist financing.

8. (SBU) Pfaffenbach suggested that western countries
should not cut off all business with Iran. Doing so would
deprive them of future leverage if the situation became
even worse. He also suggested that harming the energy
sector was akin to "shooting ourselves in the foot."
Kimmitt explained that relevant UN Security Council
resolutions linked sanctions to the proliferation issue,
and did not seek to inflict damage on the wider Iranian
economy. Tougher EU action supports the argument in favor
of continued multilateral cooperation as opposed to
Congressional proposals that would force foreign companies
to choose between trading with the U.S. or with Iran,
explained Kimmitt.

9. (SBU) Another participant, Director General for External
Economic Policy, Dr. Karl Brauner, said the Germans are not
happy with certain aspects of the dialogue within FATF.
They feel the chairman of the working group should have
allowed for more private discussions and more consensus
building behind the scenes. Kimmitt encouraged Germany to
support the work of the FATF on the Iran issue as Iran's
anti-money laundering and counterterrorist financing
deficiencies were identified by the group over a year ago.
Kimmitt added that the FATF needs to send a clear signal to
Iran that it cannot ignore the calls of the international
community. Kimmitt asked Brauner to pass any suggestions
on ways to improve the discussion within FATF to the U.S.
Embassy in Berlin. He added that FATF should not become a
mere discussion forum, but should be able to take
decisions.

10. Note: Also attending the meeting from the Ministry
were Director General, External Economic Policy, Dr. Karl
Brauner; Head of Division, External Economic Policy, Dr.
Adrian Bothe; Deputy Director General, Foreign Trade Law,
Karl Wendling; and Head of Foreign Trade Law Division, Dr.
Ursina Krumpholz. Deputy Secretary Kimmitt has reviewed
and cleared this cable.


KOENIG

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