FRENCH STRESS MARKETS IN DEPSEC KIMMITT

C O N F I D E N T I A L SECTION 01 OF 04 PARIS 000555

SIPDIS

SIPDIS

TREASURY FOR DEPSEC KIMMITT

E.O. 12958: DECL: 03/21/2018
TAGS: EFIN EINV ETTC PARM IR FR
SUBJECT: FRENCH STRESS MARKETS IN DEPSEC KIMMITT
CONSULTATIONS

PARIS 00000555 001.2 OF 004


Classified By: ECON MINCOUNS Seth Winnick, for reasons 1.4 B and D


1. (C) SUMMARY: On March 13, Deputy Treasury Secretary
Robert Kimmitt met with Finance Minister Christine Lagarde,
Bank of France Governor Christian Noyer, Elysee diplomatic
and
economic advisors and private sector bankers to discuss the
Transatlantic Economic Council, financial market turmoil,
investment policy and sovereign wealth funds (SWF),and Iran.

In response to questions about the U.S. economy, the Deputy
Secretary summarized the bipartisan economic stimulus plan as

SIPDIS
well as public and private sector efforts to help U.S.
homeowners avoid foreclosure. He alerted interlocutors to
the
recommendations to regulators, rating agencies, financial
institutions and investors that Treasury Secretary Paulson
would be making later that day on behalf of the President's
Working Group on Financial Market's (PWG),as well as the
Treasury Department's forthcoming blueprint for modernizing
financial regulation. He stressed the importance of
maintaining open investment policies that allow a
constructive
role for SWFs and urged stringent application of UNSC
Resolutions on Iran, including their implications for
treatment of Iranian financial institutions.


2. (SBU) French financial sector representatives expressed
concern about continued financial turmoil and are looking for
a "serious remedy" from the U.S. Furthering common rules and
principles for financial markets, internationally, will be a
priority area for transatlantic cooperation during the French
EU Presidency, along with further coordination regarding
third
countries such as China. Elysee advisors also want more
concerted action to pressure Austria, Italy, Australia,
Japan,
and Canada to be tougher on Iran. END SUMMARY.

Finance Ministry Says Bankers Worried over Financial Turmoil
-------------- --------------

3. (U) Referring to disquiet in the French banking sector,
Minister of Economy and Finance Christine Lagarde said French
banks are looking for a "serious remedy" to current turmoil
coming from the U.S. Director General Xavier Musca relayed
concerns that asset write-downs could eventually become a
vicious circle, leading to permanent devaluation across asset
classes. The Deputy Secretary stressed that the USG opposes
any bail out of speculators or institutions that have acted
irresponsibly and is watching the markets carefully. Citing
President Bush, DepSec Kimmitt said the Administration has
yet
to see "a good proposal" for government intervention in
housing markets but is maintaining a dialogue with Congress
on
the issue.

French Presidency: Economic Priorities
--------------

4. (SBU) The Deputy Secretary highlighted the role of the
Transatlantic Economic Council in feeding into the U.S.-EU
summit process and urged vigorous French participation. He
credited TEC with giving political momentum to mutual
recognition on accounting standards and being helpful in the
discussion of SWF's. Musca said that France plans to use its
EU Presidency to further common rules and principles for
financial markets, consistent with the work of the Financial
Stability Forum. There is a premium on avoiding market
distortions across the Atlantic. In this vein, he also said
"mutual recognition of markets" by the SEC and European
regulators was an important way forward, particularly in
light
of the NYSE-Euronext merger. He cautioned that EU
recognition
of US GAAP was still working its way through the process and
that the broker-dealer issue is "not ripe" yet. Noting that
France will organize nine summits with various countries for
the EU, Musca highlighted the opportunity to promote common
U.S.-EU economic objectives, e.g., applying pressure
regarding
trade and exchange rate practices during the EU-China summit
in November


PARIS 00000555 002.2 OF 004



5. (SBU) Kimmitt noted that Secretary Paulson travels to
Beijing soon to meet the new economic leadership and that
this
will be followed in June by another US.-China Strategic
Economic Dialogue. Kimmitt and Musca agreed that it would be
useful to consult closely. On the mutual recognition issue,
Kimmitt stated that SEC Chairman Cox has been very forward
leaning on international issues, but TEC had spurred this on
by giving added political impetus. By early April, Treasury
will release a blueprint for financial sector regulation,
among other things to modernize and to cope with the
multiplicity of U.S. regulatory bodies, which also impact on
French and other foreign financial services businesses
operating in the U.S.

GOF looks at Class Action Suits
--------------

6. (SBU) Lagarde mentioned that the Cabinet had just
discussed
class action suits with President Sarkozy and she is looking
for "ammunition." She said she is opposed to measures that
would make them more widespread in France, but succeeded only
in limiting the concept to a trial period. For the moment,
an
"experiment" will be conducted with class actions in three
narrowly defined areas. She said she would welcome any
studies or other data that the USG might have on the relative
merits of class action suits, including the degree to which
awards reach class members.

Bank of France sees Continuing Market Turmoil
--------------

7. (SBU) Bank of France Governor Noyer said that the U.S.,
Europe and others need to exchange more experiences on what
instruments seem to be working best. Financial markets are
not currently functioning well because they lack term
liquidity, but there is growing concern over solvency, not
just in the U.S. but in some European countries. Monoline
bond insurers have run into trouble, as have some hedge
funds,
and market players are wondering what could be next. This is
partly due to the practical challenges posed by "mark to
market" accounting rule that impose pain and even panic, when
markets fail to generate a price that auditors can use for
reference as to current value. Central banks, Noyer
insisted,
do not have an answer.

Financial Regulatory Modernization Needed across Atlantic
-------------- --------------

8. (SBU) While appreciating the complexity of U.S.
federalism,
Noyer (who once worked on loan at the Federal Reserve Bank of
New York) said he strongly believed that consolidation and
simplification of U.S. financial regulation would be
salutary.
His experience suggested enormous advantages to having the
central bank and the banking supervisor "under one roof,"
permitting more detailed knowledge of balance sheets,
exposures and visibility of day-to-day activities of banks.
At the same time, he said, euro area bank supervision needs
closer coordination, possibly with lessons learned from the
Fed on developing common doctrine, methodology and rules. In
his view, the Euro-area "Lamfalussy framework" needs to be
transformed from being strictly advisory to a decision making
body. As a first step, he said, the French would seek steps
toward merger of bank supervisory functions during their EU
Presidency, beginning with allowing headquarters country bank
supervisors to take the lead in dealing with international
banks across the Euro area.

Iran's Banks under Scrutiny
--------------

9. (C) In response to the Deputy Secretary's query regarding
the current status of Iranian banks Sepah, Melli and Saderat
in France, Banking Commission Secretary General Danielle Nouy
confirmed complete GOF control of Bank Sepah, adding that the
GOF is working closely with the UK and may/may move on Bank
Melli even before the EU does.


10. (C) The Banking Commission General Counsel informed the
Deputy Secretary that the Iranian Central Bank (Bank Markazi)
had ceased its active refinancing of Paris-based subsidiaries

PARIS 00000555 003.2 OF 004


of Iranian banks, coinciding in part with the U.S.-origin
civil suit which led to a temporary freeze of some Bank
Markazi assets in Paris. In addition, he noted that the
Banking Commission had detected no trace of other Bank
Markazi
transactions in French banks. In a subsequent side
conversation with Econoff, the General Counsel said that
there
was no certainty that Bank Markazi had halted all other
operations, only that the Banking Commission was no longer
detecting any. He added that the account Markazi had opened
with Bank Natixis in August 2007 about which U/S Stuart Levey
had inquired in October, had been used solely for payment of
specific French exports to Iran and was no longer showing
activity.

Elysee Advisors Raise Iran, Finance
--------------


11. (C) During a working lunch, Deputy Diplomatic Advisor
Damien Loras brought up the need for more coordination on
Iran. Within the EU, Loras said, France, UK, and Germany are
pushing hard for tightening financial sanctions on Iran.
Italy and Austria have been blocking them, but France and its
partners will keep at it. Loras said there is an urgent need
for the U.S., France, the UK, and Germany to work together to
raise sensitivity in Ottawa, Canberra, and Tokyo, which are
also "weak links." The French also believe that Emirates in
general and Dubai in particular are key to increasing
pressure
on Iran. Kimmitt and Loras agreed that the sovereign wealth
fund angle was an important lever, in that it would be more
difficult for a country's SWF to invest in the U.S. or Europe
if the country did not live up to its UN obligations on Iran.


12. (SBU) Elysee economic Advisor Ramon Fernandez agreed that
the TEC is an important tool for further reducing trade and
investment barriers across the Atlantic. As to specific
concerns connected with financial market turmoil, Fernandez
raised the negative implications of any failure of monoline
bond insurers. (Note: Earlier this year, corporate and
investment bank Natixis transferred its U.S. monoline
subsidiary, CIFG, to its parent banks to make possible a USD
1.5 billion recapitalization to keep CIFG solvent.) Kimmitt
agreed that close communication on financial sector
developments with the GOF would remain important.

Bankers Roundtable
--------------


13. (U) Deputy Secretary Kimmit met with French bankers and
representatives of U.S. banks in France for an exchange of
views on financial markets. He outlined the U.S. economic
stimulus package and the work on forthcoming proposals for
modernization of the U.S. financial framework.


14. (U) Bankers raised questions about the effectiveness and
impact of the economic stimulus package, given current
private
debt levels in the U.S. They also noted the possibility that
"mark to market" rules for accounting were generating
increased volatility and that changing emphasis in prudential
rules for banks were generating a "boomerang" effect as
assets
were brought back onto balance sheets.


15. (U) The bankers confirmed that the French banking sector
is being hit hard by market turmoil, even if not as badly as
in the U.S. This is leading to problems across all asset
classes. Supposed "money market" funds are also hit by
subprime-related problems. There are potential sellers, but
no buyers, even at the quoted prices, for some assets, with
even cash markets freezing up. Investment banks simply lack
the liquidity to bring assets back onto balance sheets, they
explained. Retail banking is cushioning some of the impact
for French banks, which have significant retail networks.
French banks have been very aggressive in writing down
losses,
they said, but bringing off-balance sheet items back on is
taking a toll in a kind of "spiraling" impact. Some
expressed
doubts about whether Federal Reserve action is really
relieving the credit crunch.

PARIS 00000555 004.2 OF 004




16. (U) This cable has been cleared by Deputy Secretary
Kimmitt.
Please visit Paris' Classified Website at:
http://www.state.sgov.gov/p/eur/paris/index.c fm


PEKALA