French banks accept €10.5bn in state loans to boost credit

FRENCH BANKS have for the first time tapped into the €360 billion which President Nicolas Sarkozy promised to make available on October 13th.

Most of that sum - €340 billion - is to provide inter-bank loan guarantees, while €40 billion was allotted to recapitalise banks.

The finance minister, Christine Lagarde, and the governor of the Banque de France, Christian Noyer, announced that €10.5 billion - the first tranche of the €40 billion - is being loaned in the form of subordinate bonds ( repayable after other debts have been met) to France's top six banks.

The loans are proportionate to the size of the banks. The country's biggest bank, Crédit Agricole, will receive €3 billion; BNP Paribas €2.55 billion; Société Générale €1.7 billion; Crédit Mutuel €1.2 billion; Caisse dÉpargne €1.1 billion and Banque Populaire €950 million.

The loans will be dispensed by the €40 billion SFFE fund for the recapitalisation of the economy. French banks were initially reluctant to take advantage of the government's offer, for fear that borrowing would be perceived as a sign of weakness.

When presenting the move late on Monday, Mr Noyer insisted that French banks were not short of capital and do not need recapitalisation. "The aim of the operation is not to recapitalise the banks . . . but to support the financing of the economy," he said.

In other words, French banks are being supported, not rescued. The government hopes to avoid credit drying up, a classic problem in times of recession. Ms Lagarde said the same amount will be on offer in 2009.

The banks have agreed to increase lending by between 3 and 4 per cent annually, and have signed a commitment to provide more bridging loans for property purchases and to finance more small and medium-sized businesses. They also promised to adopt "ethical" rules limiting salaries and departure bonuses for top management and banning "golden parachutes" for failed executives.

Although the primary goal of the plan is to send a political signal that the state is encouraging the development of credit, it will also raise the Tier 1 capital ratio, or banks' core equity. Ms Lagarde said earlier this month that she wanted French banks to raise their Tier 1 ratio to about 9 per cent, as British banks have done. Following the loan announcement, estimates of French banks' Tier 1 ratio yesterday ranged from 8.5 to 9 per cent.

The method of subordinated bonds was chosen so as not to dilute the value of shares or affect dividends. The state will not become a shareholder in French banks. "We did not want the state to have management powers within banking establishments," said Georges Pauget, the president of the French banking federation FBF, who also heads Crédit Agricole.

The state will charge 400 base points (4 per cent) above market rate for no-risk loans, that is to say about 8 per cent. This should earn about €400 million annually for the government. Because such loans are not readily available at present, they are advantageous despite the relatively high interest rate.

The agreement, which was negotiated with the banks over last weekend, will be submitted to the European Commission to ensure the loans are not classified as state aid, which could disqualify recipient banks from purchasing com-panies elsewhere in Europe.

Speaking to the European parliament in Strasbourg, Mr Sarkozy yesterday reiterated calls for an "economic government" of the eurozone and said he has asked European heads of state and government to meet before a global summit on reforming the international financial system is held in New York next month.