Tue, Oct 04, 2011 - Page 9 News List

State of denial as France’s government ignores wider woes

By Angelique Chrisafis  /  The Guardian, PARIS

In her small fashion boutique in a village near Saint-Etienne, Valerie Dongrazi is feeling the pressure of French banking jitters and the economic rut.

The 44-year-old store owner has not paid herself a salary for more than a year. When she did, it was 1,300 euros (US$1,730) a month. She has had to start buying cheaper foreign stock, as clients in her village in southeastern France who once paid 270 euros for a good winter coat, can now afford just 150 euros. To stay on top of overheads, she relies on going to her bank to increase costly overdrafts or ask for loans.

However, with a big question mark over French banks’ stability, shares in the biggest banks plummeting and talk of a state bailout, the lifeline of bank credit to businesses like Dongrazi’s is drying up. French banks are nervous about lending money, companies are struggling and consumer confidence has fallen to the lowest level since February 2009, when France was suffering its worst recession since World War II.

“There’s a mood of fear; people are not buying for pleasure, barely for necessity. I’m not optimistic,” she said.

Rumors about the fragility of French banks and their ability to cope with losses from Greek debt has thrown a spotlight on the wider woes of the economy and its slippery hold on its “AAA” rating. The shares of France’s biggest banks have lost half of their value in just three months. In any other country, this might signal panic on the streets, but France believes it is battling bigger economic problems: spiralling public debt, stagnant growth, low business morale and high unemployment.

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French banks continue to insist they do not need a state bailout and can withstand losses. Although big international firms have begun moving funds out of Paris banks, households are not rushing to withdraw savings.

A bank run similar to the one that British bank Northern Rock suffered in 2007 would be unlikely in France, where savings have high state protection. As one economist said, there is a notion that the state will “always step in” as protector. There is little chance of a major French bank going under because it has been made clear that the government could, within minutes, take the decision to recapitalize.

However, the banking wobble has highlighted serious wider problems in the sluggish economy. Just as the omnipresent state offers a safety net for the banks, business lobbies say its suffocating grip on the country’s financial workings are more of a problem than ever. France did not fall quite as low as Britain or Ireland in 2008, but — famous for red tape, regulation and high labor costs — it is still struggling to bounce back. The eurozone’s second---biggest economy failed to grow at all in the second quarter as consumer spending nosedived.

“I think the seriousness of the banks’ situation was exaggerated,” said Marc Touati, economist at Paris-based Assya. “The real problem is growth. Unfortunately, a recession is approaching.”

He sees the risk of a slowdown that could last into next year. With no growth, there would be higher unemployment and more public debt. Failure to rein in France’s public deficit —one of Europe’s highest — could threaten credibility abroad and social cohesion at home.

“In France, even more than elsewhere, all this depends too much on politics and political decisions,” he added.

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