Eurobsolutely stupid

By Ben Hall in Paris and Nikki Tait in Brussels
Published: November 28 2008 17:40 | Last updated: November 28 2008 18:36
FT Weekend

The French government’s plan to shore up the capital position of France’s six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.

Christine Lagarde, French finance minister, on Friday spoke to Neelie Kroes, EU competition commissioner, to persuade her to lift her veto on France’s €10.5bn ($13.3bn) support package but Ms Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

The French government reacted furiously to the Commission’s argument. One senior official described it as “ridiculous” and “stupid” because it would exacerbate the credit crunch – the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.

France – unlike the UK, Germany or Italy – intended to recapitalise all its lenders at the same time to ensure they did not tighten credit to business and households. Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.

The finance ministry wanted to provide €10.5bn in subordinated loans to BNP Paribas, Société Générale, Crédit Agricole, Caisse d’Epargne, Banque Populaire and Crédit Mutuel. In return, the banks agreed to increase the stock of credit to households, business and local government by 3-4 per cent in 2009.

The French plan is one of a number of banking aid measures notified to Brussels but still not approved. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.

A number of aid packages to individual institutions, such as that proposed for Germany’s Commerzbank, also remain under discussion.

However, it has also already approved some schemes with a recapitalisation element. Germany’s framework scheme included recapitalisation proposals, for example, although beneficiaries would have to give behavioural commitments and maintain high solvency ratios.

Separately, it emerged that the French plan to underpin credit insurance for risky companies may also run into state aid issues.