France’s battered banks are becoming a burning issue for the country’s race for the election next year, with French President Nicolas Sarkozy forced to weigh the possibility of state intervention and opposition Socialists trumpeting the need for big reforms.
The eurozone crisis is already center-right Sarkozy’s single biggest headache as he grapples to safeguard France’s “AAA” rating in the face of anemic growth and scant room for spending cuts seven months from a battle for re-election.
He now faces the unpalatable prospect of having to sell a possible aid package for banks — via state lending or capital injections — to taxpayers already bitter about three years of economic pain caused in part by reckless bank lending.
Influential Socialists are calling for the state to take stakes in banks and the party’s manifesto for next year’s election places the prickly question of separating retail and investment banking squarely on the debating table.
“Things are evolving very rapidly from one week to the next, so how the issue will be put and what the different positions will be, it’s too early to say. But it’s clear this will be a subject for the election campaign for the first time in years,” BNP Paribas economist Dominique Barbet said.
France was rocked in late July and August by a stock market battering that tore 50 billion euros (US$67 billion) off the value of its top four banks, BNP Paribas, Societe Generale (SocGen), Credit Agricole and Natixis, as investors fretted about their exposure to Greece.
A rating downgrade by Moody’s of SocGen and Credit Agricole last month underscored the growing anxiety.
The government denies any plans to inject capital into banks, which are rushing through assets sales and insisting they do not need help, but sources say contingency plans have been discussed at the finance ministry for any worsening in the euro crisis, such as a eurozone failure to secure a Greek rescue.
French media have described Sarkozy’s “war room” for euro crisis meetings and the weekly Journal du Dimanche says the government toyed with a bank sector injection of 10 billion to 15 billion euros of public money at a secret meeting on Sept. 11.
Piling on the pressure, some Socialist contenders last week said it was time to give the state back a role in the banking sector, making clear that whether or not Sarkozy is forced into an aid plan, the issue will loom large over the election race.
A recent CSA opinion poll showed that 55 percent of respondents opposed any partial nationalization of banks. It also found that two-thirds of French are worried about banks, suggesting they would respond well if Sarkozy came up with an effective solution.
“This is Sarkozy’s chance to put something together and show everybody he’s still on top of things. He’s not going to act pre-emptively, but he will act if he needs to,” said Francois Cabau at Barclays Capital, when asked about a possible state rescue.
“The economic backdrop is going to play a huge role in the election. Banks are definitely going to become a big issue,” Cabau said.
Successive conservative governments have taken pride in the French banking sector, which was re-privatized in the late 1980s. Former French president Francois Mitterrand, the country’s last Socialist president, had nationalized 39 banks after coming to power in 1981.
Segolene Royal, who was defeated by Sarkozy in the 2007 election, but is competing to run again for the Socialists, said in a TV debate last week that France should have no qualms about reviving ideas that worked in the past.
“The seriousness of the crisis is forcing us to change the rules of the game,” she said.
Arnaud Montebourg, a Socialist rival backed by a tenth of left-wing voters, told the same debate that profligate banks should be reined in by making the state a shareholder and placing government officials with veto power on their boards.
He said that if elected president, he would propose an emergency law to put banks under state supervision to protect people’s savings and stop banks using them for speculation.
“The banks must be brought under control. They must be cut into pieces and this must be done very quickly,” he told the daily Liberation in an interview published on Friday.
Any hint of a regression to state ownership would send a risky signal to credit rating agencies, which Sarkozy has already disappointed by failing to win enough parliamentary backing to put a budget-balancing rule in the Constitution.
While Socialist frontrunner Francois Hollande, who runs well ahead of Sarkozy in opinion polls, is a moderate unlikely to favor nationalizations, the tough talk on the left is rattling investors already shell-shocked from the slide in bank stocks.
“I was just in Paris and one of the things some clients were worried about was, if a Socialist were to win the election, what would that mean in terms of their attitude towards banks?” a London-based bank analyst said.
“What we heard were real fears that there would be a common equity injection, rather than something more shareholder or market-friendly, if there was a French sovereign intervention under the Socialists,” he said, on condition of anonymity.
Fitch Ratings last week said that asset sales by French banks may not suffice to allay concerns about their exposure to euro peripherals. It said even a government recapitalization via hybrid debt or other temporary measures would only provide near-term market comfort and would not be a comprehensive solution.
Banks across Europe have been under pressure since the IMF at the end of August called for a boost in capitalization. French banks, which weathered the 2008 crisis well, resent bearing the brunt of the concern.
“We show US funds our results, our ratios, our balance sheets, to prove our financial solidity and profitability. They tell us, all that’s great, but you are part of a continent which may not exist next week. Don’t take it personally,” Friday’s Liberation quoted a source at BNP as saying.
SocGen and Credit Agricole have lost close to half of their value in three months and BNP Paribas’s market capitalization is down 42 percent. The three banks together are worth less than silk scarf and leather handbag maker Hermes.
All three banks are scaling back their loan books, shrinking their investment banks and selling assets to offset a squeeze in short-term funding triggered by the concerns of US funds.
Pressure remains high as financial markets anticipate a likely Greek default and demand far-reaching measures to prevent a crisis that began in Athens from spreading uncontrollably.
Chatter in Paris about what form a state aid injection to banks could take grew louder after Bank of France Governor Christian Noyer said a support mechanism set up in 2008 could be used to shore up capital in case of an “extraordinary event.”
Many experts favor issuing the government preference shares — interest-bearing instruments halfway between debt and equity. Others see pressure building for the state to hold real shares.
Sarkozy has ordered his ministers and advisers not to utter a word on the subject of a possible first-aid plan, aside from giving constant assurances that the banks are solid.
The conservative — accused of employing left-wing interventionist policies in his 6.4 billion euro rescue of Franco-Belgian bank Dexia during the 2008 crisis — must now square his firefighter impulse with the need to stick to a pro-market ideology in what promises to be a close-fought election.
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