Press Releases

February 08, 2008

Excerpts from an interview of “Frankfurter Allgemeine Zeitung” with Federal Finance Minister Peer Steinbrück on February 7, 2008

(translation by German Embassy Washington)

“The banks must quickly provide clarity”

The financial market turbulence triggered by the mortgage crisis concerns the finance ministers of the seven major industrial nations (G-7). They will look for proper responses to global uncertainty in Tokyo this weekend.

Mr. Steinbrück, how worried are you that you are boarding a plane with relatively calm weather in the financial markets in Berlin and heading for a storm in Tokyo?

I don’t have the impression that we are experiencing calm weather. The crisis in the financial markets represents a challenge for the global economy. I do, however, believe that the European and, in particular, the German economies are currently better weather-proof than the American economy.

The Japanese government said that the most important thing is not to create a panic mood in the financial markets. But what do we do if the situation becomes serious. How do you plan to stop a heard of buffalo that is already galloping over the prairie?

That metaphor is false – and nobody should start talking people into believing something which definitely is not helpful. The markets are extremely nervous, indeed. Confidence has been lost. The markets must return to a realistic and adequate assessment of risk. The banks must quickly provide clarity about their balance sheets. And then we can look ahead. I will offer proposals in Tokyo that, I believe, could lead to improvements in the areas of bank capital reserves, better liquidity management, and greater transparency in the markets.

Do the G-7 nations have to prepare a coordinated strategy for calming the financial markets and stimulating the economy?

In my view, such a strategy can be developed from the elements I just mentioned. However, I do not believe that short-term stimulus programs are the right response. At least, not in Europe or even in Germany. We have achieved a great deal with the € 25 billion federal investment program from 2006, which together with the states’ participation grows to a volume of approx.
€ 37 billion; an additional € 10 billion stimulus, which we added in 2007; the reduction in contributions to unemployment insurance, resulting in relief worth nearly € 26 billion; and corporate tax reform. This has the enormous advantage that it is having an effect now and not some time in the future.

Has the German Government already factored a U.S. recession into its growth projections?

On the basis of the information currently available, we have projected a growth rate of 1.7 percent, which is a cautious estimate and has been confirmed by many.

. . . .

In the financial market crisis, the magic word for policymakers is transparency. What does that specifically mean?

We will have to look at the role of the rating agencies, cooperation among international supervisory agencies, and the appropriate accounting of off-balance sheet vehicles. Particularly this last point currently has a lot to do with the banks having lost sight of the real risks, which they had hidden in their so-called SIVs, structured investment vehicles.

. . . .

The ratings agencies have become suspect. First, they advised the banks on how they could best bundle and sell their loans. Then, they themselves gave them the best ratings. Now everyone sees that these ratings are worthless. Banks won’t make the same mistake again. Aren’t policymakers too late in advising the financial industry to refrain from such combined transactions?

With all due respect to your optimism, my belief in the rationality of the financial industry’s decisions has, indeed, suffered somewhat. I think it is important to address the issue of how the internal governance of the rating agencies can be improved. The initiated discussion on a set of best practices is a first step in the right direction.

Isn’t that a fundamental problem of the ever more complex, integrated world? Policymakers lurch convulsively to the right – for example, targeting the hedge funds – while the danger is rolling in unnoticed from the left?

Why do you say convulsively? Our Initiative to Improve the Transparency of Hedge Funds was and is correct – and has meanwhile brought positive results. We can only respond to issues as they emerge. That is always part of the problem. But I would be surprised if the experiences of the past months have not raised doubts also in your mind about the rational superiority of the market. We therefore need political responses to counter excesses and systemic financial crises that could have serious consequences.

You have called on the banks to provide clarity and disclose their total exposure. Is that possible when constantly new areas are being seized by the financial crises?

It is now a matter of putting on the table everything that is known. When we are bowled over every three weeks with new bad news, the psychological effect is much worse than if we were to make a clean break. Understandably, we can only deal with the areas that are known. Further market developments are difficult to calculate.

What lessons for bank supervision have you learned from the financial market crisis? Does it not speak for strengthening the central bank?

The recent market turbulence has shown that international financial markets are closely intertwined. National supervisory authorities, ministries, and central banks should therefore move more closely together within the EU – in times of crises and in normal times. Anyone from outside the EU who wants to participate is cordially invited to do so. Nationally, we have two strong supervisory agencies to which we are, as a matter of principle, committed. They have now offered proposals on how they can work together more efficiently in the future.

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