TREASURY DEPUTY SECRETARY KIMMITT SPEAKS WITH GERMAN FINANCE

S E C R E T SECTION 01 OF 02 HAMBURG 000062 SIPDIS STATE FOR E, EEB AND EUR/AGS SIPDIS E.O. 12958: DECL: 10/23/2017 TAGS: EFIN ECON ETRD GR SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT SPEAKS WITH GERMAN FINANCE MINISTER ON SOVEREIGN WEALTH FUNDS, EXCHANGE RATES, AND IRAN HAMBURG 00000062 001.2 OF 002 CLASSIFIED BY: Karen Johnson, Consul General, U.S. Consulate General Hamburg, U.S. Department of State. REASON: 1.4 (b),(d) SECRET NOFORN SIPDIS ¶1. (C) SUMMARY: The main focus of Deputy Treasury Secretary Robert Kimmitt's and German Finance Minister Peter Steinbrueck's October 16 meeting in Hamburg was the creation of "guidelines" or "best practices" for Sovereign Wealth Funds (SWFs). Both Steinbrueck and Kimmitt agreed that the discussion for such "guidelines" should take place in a multilateral forum. They also agreed on a voluntary, industry derived set of "guidelines" or "standards" for hedge funds. Steinbrueck reported that France's push for G-7 statement on the euro/dollar exchange rate would likely not be successful as the majority of Euro Group members, including Germany, did not support this approach. Kimmitt informed Steinbrueck that intelligence regarding German banks' interactions with Iran would be passed to his staff. END SUMMARY AGREEMENT ON WAY FORWARD ON HEDGE FUNDS AND SWF PRACTICES -------------- -------------- -------------- ¶2. (SBU) After hearing Steinbrueck's speech earlier in the day, Kimmitt offered that past disagreements concerning a "code of conduct" for hedge funds were largely due to a linguistic misunderstanding and not a substantive difference. Americans tend to view a "code of conduct" as being mandated from above, whereas "best practices" or "guidelines" connote self regulation. Both Kimmitt and Steinbrueck were in agreement that such "guidelines" would work best if they emanate from industry and are not mandated by governments. ¶3. (C) Referring to his talks with Russian Finance Minister Aleksey Kudrin on October 15, Steinbrueck observed that Kudrin has been moving very cautiously regarding SWFs. He noted that Russia, which established a stability fund, does not want to be compared with China. While Germany is interested in attracting foreign investment, it needs to pursue a review regime in order to prevent unwanted investment. However, Germany's priority is to remain open to investment. Kimmitt replied that one should differentiate between SWFs -- which historically have been patient, long-term investors -- and state-owned enterprises, which may represent a concern in some cases. ¶4. (SBU) The U.S. and Germany should not give the impression that they are looking at SWFs differently now because China and Russia have accumulated wealth recently. Kimmitt also stated that he has noted a developing suspicion among APEC and G20 member state representatives that the G7 member states are attempting to restrain them in the area of SWFs. This needs to be avoided by supporting technical discussions in multilateral fora. Steinbrueck supported the idea of discussing SWF best practices and policies at the international level. Kimmitt also stated that World Bank President Zoellick will want to be part of the debate. He also spoke with OECD Secretary General Gurria on a proposal to bring together the OECD, IMF and World Bank to coordinate on best practices related to investment review regimes and SWFs. Kimmitt stressed that investment barriers will need to be kept as low as possible. STEINBRUECK INTERESTED IN U.S. MORTGAGE MARKER -------------- -------------- -------------- ¶5. (U) Steinbrueck also inquired on the status of the U.S. sub-prime crisis. Kimmitt referred him to Federal Reserve Chairman Ben Bernake's October 15 remarks in which he stated that the housing market may put a drag on the U.S. economy during the 2007 final quarter and into early 2008. Kimmitt mentioned that while the mortgage market represented an economic headwind, US economic fundamentals were sound. FRANCE ALONE AMONG EURO GROUP ON EXCHANGE RATE VALUATION -------------- -------------- -------------- ¶6. (C) Steinbrueck reported that in the most recent Euro Group meeting, France stated that they would like a G7 statement on HAMBURG 00000062 002.2 OF 002 the euro/dollar exchange rate. Steinbrueck said that was not sure how the French would proceed and he assured Kimmitt that the majority of the Euro Group, including Germany, did NOT support France. Both agreed that France was pursuing a troubling path and that G7 countries should focus on structural constraints not nominal exchange rate valuations. SECOND TIER GERMAN BANKS FILLING BUSINESS VOID IN IRAN -------------- -------------- -------------- ¶7. (S) Before ending the meeting, Kimmitt informed Steinbrueck that the Treasury Department had passed intelligence on German banks' interactions with Iran to his office and to German intelligence agencies. Kimmitt told Steinbrueck that second tier German banks (BHF and DZ) were filling the business void left by Deutsche Bank and Commerz. He requested that Steinbrueck look closely at the information. Steinbrueck promised to do so upon his return to Berlin. ¶8. (U) This message has been cleared with Deputy Secretary Kimmitt. JOHNSON