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Bail-out plans: France’s free market gamble

Whisper it quietly, but Sarkozy’s bail-out plan looks the most market-savvy.

The French government has been explicit in directing the country’s six leading banks to use the €10.5 billion of tier 1 capital it injected into them last month to increase lending at a 3-4% rate to individuals and companies, especially small and medium-size enterprises.

It looks like the heavy hand of the state channelling credit to voters and employers with little regard to borrowers’ capacity to service those debts. But look again. The French plans so far enacted differ from those of the UK, the US, Switzerland and the Netherlands where governments have taken direct equity stakes in various classes of bank preference and ordinary shares and, in some cases, quickly declared an intent to appoint directors.

By contrast the French state is not, so far at least, either taking any form of equity stakes or appointing directors but merely lending subordinated debt to the banks at a spread of 400bp above the risk-free rate with a five-year call. These loans boost tier-1 capital – but not core tier-1 – by roughly 50bp but they do not dilute existing shareholders nor prevent dividend payments on shares. That leaves open the hope that if and when conventional private subordinated debt and equity capital markets revive, French banks may be more favourably received.

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