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Cablegate: Commerzbank Deal Reveals Flexibility in Stabilization Fund

VZCZCXRO4589
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #3330/01 3111207
ZNR UUUUU ZZH
O 061207Z NOV 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8497
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 FRANKFURT 003330

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: ECON EFIN GM
SUBJECT: Commerzbank Deal Reveals Flexibility in Stabilization Fund

ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION

Ref: Frankfurt 3260, Berlin 1452, Berlin 1414

1. Summary: (SBU) Commerzbank, Germany's second largest bank,
became the largest bank to date to take part in the government's
Financial Market Stabilization Fund (FMSF). The bank secured key
concessions, thus avoiding some of the more invasive aspects of the
fund. The European Commission announced it would look into the deal
saying Commerzbank may have paid too little for capital. Although
many argued the FMSF was structured poorly and would not attract
many takers, Commerzbank's move indicates that the fund may attract
more banks, and that the government will relax certain elements of
the fund. This small step forward gives hope that normal market
conditions will slowly take hold in the financial sector as
officials at the European Central Bank (ECB) admit that their
efforts have prevented a collapse of the financial system without
offering a real way forward. End Summary.

"A Sweetheart Deal" for Commerzbank
-----------------------------------

2. (U) After revealing a third-quarter net loss of 285 million
euros ($362 million) November 3, Commerzbank announced it would
accept an 8.2 billion euro ($10.4 billion) capital injection as well
as 15 billion euros ($19 billion) in loan guarantees, making it the
largest German bank to take advantage of the state's financial
stabilization fund. In exchange, the Germany government will take a
silent holding in the bank. The European Commission has promised to
investigate whether the deal is in compliance with competitiveness
requirements as Commerzbank is set to pay 8.5% and 5.5% interest on
two tranches of capital, amounts below the 10% minimum Brussels
requires.

3. (U) Commerzbank joins Hypo Real Estate (another private bank)
and BayernLB, WestLB, and HSH Nordbank (all state banks) in asking
the state for help. Commerzbank CEO Martin Blessing cited the
bank's need to raise its Tier 1 capital ratio from 7.3% to 11.2% in
order to deal with turbulent market conditions. Raising capital
will also put Commerzbank on surer footing as it goes forward with
plans to take over Dresdner Bank. The government will be required
to sell its stake in Commerzbank at the end of 2009, but the deal
could be extended by the Ministry of Finance if market conditions
have not improved.

4. (SBU) Commerzbank Executive Vice-President Christof Maetze told
ConGen Econ Off that the bank had negotiated specific terms with the
government, gaining the concession that the Ministry of Finance will
not be able to dictate any investment decisions to the supervisory
board. He argued that Finance Minister Peer Steinbrueck gave away
very little with this decision as the combined Commerz-Dresdner
entity will already be a leading lender to German industry and small
and medium-sized enterprises, which is the type of lending he wishes
to stimulate. The condition that Commerzbank freeze dividend
payments through 2009 will also have a minimal impact as dividends
were expected to be low during the assimilation of Dresdner.
Members of the Commerzbank Managing Board will, however, accept
lower salaries of 500,000 euros ($637,000), while bonuses will also
be limited. Maetze optimistically described the agreement at as "a
sweetheart deal" admitting that Commerzbank got funding on very good
terms.

Loan Guarantees Offer Way Forward
---------------------------------

5. (SBU) Commerzbank's acceptance of loan guarantees gives hope
that the FMSF will revitalize the moribund interbank lending market.
Maetze argued that rather than stigmatizing banks, participation in
the fund was viewed positively by other banks, especially those who
also were taking part, as state-backing raised confidence in
counterparties. He said that small positive trends were already
apparent: Euribor and Libor spreads (measures of interbank lending
rates) had decreased, while lending volume was slightly up.
Commerzbank intended to use the state guarantees to offer 3-5 year
term lending, a market which had largely dried up in recent times.


6. (SBU) European Central Bank Deputy (ECB) Director for Monetary
Operations Paul Mercier confirmed to Congen Econ Off that monetary
operations (whereby the ECB provides short-term liquidity to banks
in exchange for collateral) have replaced the interbank lending
market. Mercier said "Our job was to make sure the patient (the
financial system) did not die, but now the patient is addicted to
the medicine (short-term liquidity)." Monetary operations now
worked "as the opposite of an incentive" to get banks to start
lending to each other. He added that the ECB has no exit strategy

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to draw down the operations and reinvigoate interbank lending. The
loan guarantees offeed through the FMSF offer the best hope of
restoing interbank lending, although non-collateralized
non-guaranteed lending is still not on the horizon.

7. (SBU) Both Maetze and Mercier agreed tha when the turbulence
dies down, the financial setor will have to deal wit market
distortions created by government intervntion. As the EU's
concerns about the terms of he deal reveal, capital injections and
loan guarntees will distort competitiveness in the industry
artificially boosting those who get the best dea. Additionally, a
return to the halcyon days oflow transaction fees and mutual
confidence may nver take place. The new financial order will most
likely be one of higher operating costs and lowe returns, but
hopefully also one better poised toavert future crises.

8. (SBU) Comment: Commerzank's entry into the FMSF gives hope that
the fud will work as designed and bring in a range of participants.
It also shows, however, that banks that are not in deep trouble
will take part only when the terms are favorable. In this case, the
Ministry of Finance, having earlier been criticized for designing an
unattractive rescue package, has shown a willingness to give banks
very favorable terms, even at the risk of creating a backlash in the
EU. End Comment.

9. This cable was coordinated with Embassy Berlin.
POWELL

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