State Steps in to Ensure Bank Consolidation in Germany

UNCLAS SECTION 01 OF 02 FRANKFURT 000239

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: EFIN ECON GM

SUBJECT: State Steps in to Ensure Bank Consolidation in Germany

Ref: 08 Frankfurt 2735

ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION


1. Summary: Both Deutsche Bank and Commerzbank are speeding up
efforts to complete takeovers despite deteriorating balance sheets
and losses in the fourth quarter. Finance Minister Steinbrueck has
taken a firm position in favor of consolidation, stepping in to
assure that the deals go through in the hope of warding off bank
failures. In both merger cases the state will assume ownership
stakes in the new entities, ultimately putting tax payer money on
the line if share prices do not recover. Steinbrueck and his
colleagues in the Grand Coalition also seem motivated to create
larger financial institutions that can help the German economy stay
competitive globally. End Summary.

Commerz and Deutsche Restructure Takeover Deals
-------------- --


2. Commerzbank, Germany's second largest bank, received an
additional 10 billion euro ($12.9 billion) capital injection January
8, giving the German state a 25% stake in the bank. Coming on top
of the 8.2 billion euro ($9.84 billion) injection received two
months ago, the capital enabled Commerzbank to complete its takeover
of Dresdner Bank last week. Minister of Economics Michael Glos
(CSU) denied that the aid constituted a nationalization, maintaining
that the government will sell back its shares when their value
increases, but for now the government will have two seats on the
supervisory board. (Note: Commerzbank had renegotiated the purchase
from Allianz in November, speeding up the takeover, but paying more
in shares and less in cash, thereby lowering the overall sale price.
Commerzbank has since announced it lost money in the fourth quarter
of 2008.) In a recent speech, CEO Martin Blessing defended the
takeover arguing that he had not expected a further deterioration of
the financial markets when the original deal was announced in
August.


3. It is also expected that Germany's largest bank, Deutsche Bank,
will restructure its deal to purchase 30% of Postbank from Deutsche
Post, also offering shares instead of capital and lowering the sale
price. If the deal goes through, Deutsche Post could own as much as
8% of Deutsche Bank, making the state, which partly owns Deutsche
Post, an indirect owner of Deutsche Bank. Deutsche Bank will also
have the right to purchase a larger share of Postbank within three
years. The likely restructuring reflects Deutsche Bank's own
difficulties coming up with capital after announcing a 4.8 billion
euro ($6.2 billion) fourth-quarter loss, and an annual loss of 3.9
billion euros ($5 billion) for 2008.


4. In both cases, the sellers have shown a willingness to accept
poorer sales conditions in order to keep the deals alive. The sale
price of Dresdner and Postbank will end up much lower than
originally announced, while the shares received in Commerzbank and
Deutsche Bank as payment continue to plummet. However, the sellers
have little choice as banks must hold on to precious capital in an
environment where a strong capital to assets ratio is the only way
to maintain investor confidence.

Government Looks to Create Bigger Banks
--------------


5. Finance Minister Peer Steinbrueck has expressed strong support
for the Commerz-Dresdner deal saying: "I think there is no
alternative to a bigger concentration of the German banking sector
as this is needed to remain competitive and fully reap the benefits
of international capital markets. The combination of these two
institutions is clearly in the interest of Germany as a financial
centre." Christoph Swonke, an economist at the German Council of
Economic Experts, explained to Econ Off that Steinbrueck and other
senior politicians have long wanted to create larger German banks
that can better help industry and business compete globally and have
taken advantage of recent turmoil to achieve this goal. Germany's
financial landscape is relatively dispersed, with no German bank
among the world top ten in 2008 as measured by market
capitalization. Swonke argued that politicians would not say
explicitly that they hoped to create "national champions" as that
term implied a strong role for the state in the economy (which goes
against both EU and domestic policy positions),but the drive for
mergers was in effect this phenomenon in all but name.


6. Deutsche Bank Economist Bernhard Speyer echoed the point saying
that as large international banks like Fortis and Royal Bank of
Scotland reduce their lending in Germany due to their own
difficulties, it would be all the more imperative to have large
domestic banks that could provide funding to both large and small
enterprises. (Note: The current credit crisis has hit large

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enterprises harder than smaller, as banks are unable or unwilling to
come up with the significant long-term funding such entities
require; thus the vitality of large German banks is more critical
than ever.) Speaking at a roundtable discussion in Frankfurt
January 15, European Central Bank board member Juergen Stark
criticized the German government moves, saying that the state was
taking on real risks that would fall to the taxpayer should share
prices not rebound.

Comment
--------------


7. As the credit crisis worsened, Commerzbank's takeover of
Dresdner became "the right deal at the wrong time" and only state
intervention kept it from failing. The government now finds itself
a part owner of Commerzbank, likely soon of Deutsche Bank, and
possibly of much maligned Hypo Real Estate if it continues to
stumble. In these cases however, Steinbrueck appears to see
intervention as worth the risk not only to stabilize the financial
system, but also to bring about the consolidation in the industry
which he has long supported. End Comment.


8. This cable was coordinated with Embassy Berlin.
POWELL