TREASURY DEPUTY SECRETARY KIMMITT'S MEETING WITH

C O N F I D E N T I A L SECTION 01 OF 02 BERLIN 000554

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E.O. 12958: DECL: 03/18/2017
TAGS: EFIN ETTC PREL GM
SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT'S MEETING WITH
GERMAN FINANCE MINISTRY STATE SECRETARY MIROW


Classified By: EMIN Robert F. Cekuta for reasons 1.4 (b) and (d).


1. (C/NF) Summary: Treasury Deputy Secretary Kimmitt and
German Finance Ministry State Secretary Dr. Thomas Mirow
discussed the increased risks facing German firms in Iran and
the need for targeted financial measures focused on Iranian
illicit conduct. They also discussed hedge funds, the
financial services industry, and German plans regarding the
future of Economic Recovery Program funds. End Summary.

Iran Sanctions and Export Credits
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2. (C/NF) Highlighting the recent action on North
Korean-related funds in Banco Delta Asia, Treasury Deputy
Secretary Kimmitt expressed hope that a similar approach --

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narrowly targeted financial measures focused on illicit
conduct -- would also prQuce results in Iran. To that end,
he underscored the need for a UNSC resolution to accompany
continued dialogue with close allies. Mirow felt the P5 1
countries were coming to an agreement, but added that Germany
wishes to prevent another crisis in the region. He added
Ahmadi-nejad's election surprised most observers,
underscoring the problem Iran's opaque domestic situation
would present in evaluating the impact of an UNSC resolution
on the regime.


3. (C/NF) Acknowledging the change in Iran's credit risk
rating by the OECD, Treasury Deputy Secretary Kimmitt warned
Mirow that providing export credits to German firms working
in Iran could prove counter to our common goals by covering
the additional risk generated by Iran's own political
behavior. Iran should be held responsible for the additional
risk its policies create, including increased costs of
conducting business. Breaking Germany's long tradition of
good bilateral economic dealings with Iran would prove
difficult, Mirow explained, and Germany would need to walk a
thin line, potentially by narrowing Hermes credit financing.
Deputy Secretary Kimmitt emphasized that risks with Iranian
state-owned banks remained especially acute.

Financial Sector and Hedge Funds
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3. (SBU) Treasury Deputy Secretary Kimmitt emphasized that
the February statement of the President's Working Group
represent the beginning, not end, of discussions about hedge
fund regulation and that the G-7 was the optimal forum to
continue international dialogue. Mirow responded that the
February G-7 meeting in Essen reached consensus on tasking
the Financial Stability Forum (FSF) to present an update of
its 2000 report on the issue at the April IMF meetings in
Washington. Mirow further added Germany does not wish to
pursue hedge fund regulation but sees the need for greater
exchanges of information between the financial services
industry and public sector regulators. He said G-7 Deputies
would meet with the private sector on the margins of the
Washington IMF meeting while developing a policy paper to
present at the May G-8 Finance Ministerial in Potsdam.
Conceptually, these efforts would focus on a code of conduct
for market participants and a set of best practices mutually
agreed upon by industry and regulatory agency
representatives. Mirow added Japan would need to decide how
to clarify and follow-up on plans regarding hedge funds for
their 2008 G-7/G-8 presidency.


4. (SBU) Mirow explained Chancellor Merkel may seek to
introduce hedge fund discussions into the June G-8 Summit in
Heiligendamm, reflecting her sense that the leaders need to
focus, at least for a portion of their meetings, on economic
issues. Mirow added it is not Finance Minister Steinbrueck's
suggestion that leaders look at hedge fund issues. Treasury
Deputy Secretary Kimmitt noted the U.S. sees this as a G-7,
not G-8 topic, and that it would be important to deal with
hedge funds as a financial, not a political, issue. One
possibility if the Chancellor insisted on discussing hedge
funds at Heiligendamm would be a reference in the G-8 Summit
communiqu highlighting the work undertaken in G-7 finance
ministerials on hedge fund issues.

Economic Recovery Program
--------------


5. (C/NF) Treasury Deputy Secretary Kimmitt cited the
strong U.S. concerns about draft German legislation to

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transfer Economic Recovery Program (ERP) funds to the German
development bank Kreditanstalt fuer Wiederaufbau (KfW).
Ahead of a the first Bundestag reading of the bill March 22,
Deputy Secretary Kimmitt cited potential congressional
concern about any decision that would either refocus funds
inconsistent with the original intent of the allocation or
would divert USG money to any organization that may support
controversial funding projects. Mirow acknowledged the
important historical legacy of the Marshall Fund-era ERP as a
fundamental element of the German-U.S. relationship and added
the German government's view that the means of using the
capital would not change. In response to any potential
concerns about Iran, Mirow noted that any UNSC resolution
adopted on Iran sanctions would provide a legal basis for
revising any Iran-related activities of KfW. Deputy
Secretary Kimmitt added that strengthening KfW's balance

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sheet with ERP funds would reduce the bank's lending costs
and could create an attractive alternative from commercial
banks for firms like EADS. Mirow responded that depositing
ERP funds in KfW would not change EADS' activities with the
bank, concluding that the German government, not KfW, would
assume the risk in this case.


6. (U) Deputy Treasury Secretary Kimmitt has cleared this
message.
KOENIG