France’s Quiet Bank Rescues Top $78 Billion With Peugeot

"Free Market" Socialism in France 

By Fabio Benedetti-Valentini 

France’s aid to PSA Peugeot Citroen SA (UG)’s troubled finance arm brings the state’s backing for the nation’s banks to more than 60 billion euros ($78 billion).

The government yesterday said it will guarantee 7 billion euros in new bonds by Banque PSA Finance, the consumer-finance unit of Europe’s second-largest carmaker. The aid comes on top of support for Dexia SA (DEXB), the French-Belgian municipal lender, and for home-loans company Credit Immobilier de France.

“These bank rescues on the quiet should be getting more critical market attention,” said Bill Blain, a strategist at Mint Partners Ltd. in London. “We don’t know what’s next, but it certainly demonstrates that some of the specialized financial institutions remain very, very weak.”

The third such French bailout in the past year coincides with President Francois Hollande’s push for a European banking union and a common euro-area bank supervisor to break the link between lenders and governments. It also comes as the French government struggles to keep a pledge to cap its budget deficit at 3 percent of gross domestic product next year.

Specialized lenders have been hit by a liquidity crunch as a result of Europe’s debt crisis, leaving them with rising funding costs. Banque PSA, Dexia and Credit Immobilier de France all tapped the European Central Bank’s long-term loans.

“If you’re not a large bank, wholesale funding is expensive without state or ECB backing,” said Francois Chaulet at Montsegur Finance in Paris, which manages about 200 million euros and owns Banque PSA’s debt. Peugeot “can’t pass on higher funding costs to clients; buyers will turn to Volkswagen.”

Peugeot Details

Peugeot, which is smaller than Germany’s Volkswagen AG, needs the French guarantees to keep down borrowing costs, which are reflected in the financing rates paid by customers.

French buyers currently pay as little as 1.9 percent annual interest on 10,000 euros in financing from Volkswagen, the company said. From Peugeot, the same loan would cost around 11.6 percent annually, according to the automaker’s website.

Attractive financing terms have become critical to luring customers as the European auto market heads to its biggest drop in 19 years, hurting sales and profits. Peugeot is eliminating 8,000 jobs and closing a factory near Paris.

Like Volkswagen Financial Services, Peugeot’s financing arm is profitable. It is, however, under review for a possible downgrade by Moody’s Investors Service and may be rated junk to reflect its parent’s woes. A non-investment grade rating for the bank would increase borrowing costs and as a result worsen financing conditions for customers and dealers.

Little Risk

“The parent company’s cuts by ratings agencies no longer permit PSA Finance to refinance in a satisfactory manner,” Peugeot Chief Executive Officer Philippe Varin said in an interview today in Les Echos.

The unit, which is subject to banking regulation and supervision, needs to refinance about 7.7 billion euros of debt maturing through 2015, according to data compiled by Bloomberg.

The French government maintains that the guarantees it’s providing won’t hurt the budget so long as they aren’t activated. The bailouts are included in the government’s budget as off balance-sheet items, a French government official said.

Aid to the Peugeot finance unit is part of a government effort to stem a slump in the economy and joblessness that has left France with a 13-year high unemployment rate of 10 percent.

Banque PSA “is not a systemic risk permeating larger French institutions,” said Steve Hussey, a London-based financial-institutions analyst at AllianceBernstein Ltd., which oversees about $400 billion. “The French historically, more than in other European countries, are likely to engineer ways to keep their banks in health.”

Dexia, CIF

France is already backstopping 36.5 percent of 73.5 billion euros of outstanding state guarantees on the debt of Brussels- based Dexia, which was the first victim of the sovereign debt crisis at the core of Europe. Belgium wants it to do more.

The two countries are holding “very difficult” talks on state guarantees for Dexia, Joaquin Almunia, European Union Competition Commissioner, told European lawmakers on Oct. 8.

While France and Belgium rushed to protect their local units last year, hurdles to an agreement remain as they wrestle over responsibility for assets hit by the crisis that has caused the bank’s short-term funding to evaporate.

The French government is also providing a guarantee of about 28 billion euros to bolster Paris-based mortgage bank Credit Immobilier de France, or CIF, as it’s known.

‘Unique Case’

CIF, which is owned by 56 local cooperative lenders, had a 4 percent share of the French housing-loan market with about 33 billion euros of real estate loans as of January. Finance Minister Pierre Moscovici this week told parliament that state- owned La Banque Postale may take over much of CIF’s business.

“Each case here is a unique case,” said Roger Doig, a credit analyst at Schroeders Plc. “I don’t think it’s a systemic bailout from the backdoor. It’s definitely on a smaller scale than what has been done in the U.K. and Spain” and no capital injections are being mulled, he said.

The U.K. government owns 81 percent of Royal Bank of Scotland Group Plc after giving it a 45.5 billion-pound ($73 billion) bailout during the financial crisis, the biggest bank rescue in the world. It also owns 40 percent of Lloyds Banking Group Plc after providing a 20 billion-pound bailout in 2008.

In June, the Bank of England said it would activate an unused facility to inject at least 5 billion pounds a month into the financial system. A separate “funding for lending” program lets banks swap assets with the central bank in return for lending money to companies and households.

More Help

In Spain, mounting losses linked to real estate spurred the government to request as much as 100 billion euros of European Union financial aid to shore up its banks. Spanish banks have a combined capital shortfall of up to 59.3 billion euros, an independent stress test showed last month.

Support for the specialized lenders in France, meanwhile, comes as the situation for the country’s three largest banks -- BNP Paribas SA (BNP), Societe Generale SA and Credit Agricole SA --has stabilized. That’s thanks to 1 trillion euros of liquidity the ECB ploughed into the region’s financial system and ECB President Mario Draghi’s agreement to buy bonds, under some conditions, of euro nations whose sovereign yields have soared.

The financial institutions being propped up by the French government have needed help even after they tapped ECB funds.

“If we had full banking union, the burden wouldn’t be only on French taxpayers,” Mint’s Blain said. “German and other taxpayers would contribute too.”