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Viewing cable 08FRANKFURT3330, Commerzbank Deal Reveals Flexibility in Stabilization Fund

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Reference ID Created Released Classification Origin
08FRANKFURT3330 2008-11-06 12:07 2011-08-24 01:00 UNCLASSIFIED Consulate Frankfurt
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 
 
FRANKFURT 00003330  002 OF 002 
 
 
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