Cablegate: German Financial Bailout Approved
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
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DE RUEHRL #1414/01 2940556
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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
STATE FOR DRL/ILCSR AND EUR/AGS
LABOR FOR ILAB (BRUMFIELD)
TREASURY FOR OASIA
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
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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
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.