French Bank Bailout
October 13, 2008
The proposal calls for a maximum of 320 billion euros of guarantees to restore confidence in the interbank credit market and stimulate lending between banks and from banks to households and businesses.
Afraid of lending to failing institutions, banks were "keeping liquidity for themselves and it was no longer circulating," Sarkozy told journalists in Paris. “We have to create conditions to get it moving again.”
To that end, the French government will create an authority that will guarantee loans for a period of five years, the French president said.
In return, banks will be asked to abide by certain obligations, including the manner in which their executives are paid. Sarkozy has vowed to do away with exorbitant severance payments to executives who have incurred unreasonable risks.
Pan-European action
The French package forms part of a sweeping, Europe-wide, trillion-dollar bailout of banks. The German government announced its own rescue package Monday, which is to include 80 billion euros in fresh capital and 400 billion euros in loan guarantees.
The British government, meanwhile, said it would invest 37 billion pounds (47 billion euros) in its ailing banks.
When announcing the German bailout package, Chancellor Angela Merkel insisted that international efforts to halt the downward spiral of global finance markets would amount to nought if not accompanied by parallel regulation that would end “market excesses.”
“Today's measures are the first element of a new financial market charter ... but it can only be worthy of the name if it is followed by a second element, namely a change in international rules," she said after her cabinet approved the package.
Likewise, in Madrid, Prime Minister Jose Luis Rodriguez Zapatero announced that the Spanish government would set aside a maximum of 100 billion euros to cover interbank loans.
The governments of Austria, Italy and the Netherlands also said they would shore up their banks
Instant reaction
As news of the European bailouts aired, shares rose strongly across the board. The London FTSE 100 index of leading shares gained 8.26 percent, in Paris the CAC 40 rose 11.18 percent -- its largest ever one-day gain -- while the Frankfurt DAX soared 11.40 percent.
The Swiss Market index gained 11.39 percent, while increases of 11.49 percent in Milan and 10.65 percent in Madrid were recorded.
In rhetoric aimed at soothing ongoing market fears, Sarkozy said the French state would take control of any bank and change its management to prevent it from going bust. “The French state will not let any bank fail," the French president declared.
"The greatest risk now would have been not to be bold," he said. "There was no other reasonable choice."
Recession “unavoidable”
Despite the renewed market confidence, Dominique Barbet, an economist for the French bank BNP Paribas, said the proposals to support interbank lending and struggling financial institutions "look okay" but have probably come too late to avoid a recession.
"The problem is that no matter what measures you take you will not avoid a credit crunch," Barbet said. "We are heading for tough economic times."
But Barbet commented, however, that without the bailout action industrial nations would have experienced a depression. "In this regard, a recession is a kind of best-case scenario."
Benoit Debroissia, financial analyst at Richelieu Finance in Paris, agreed, saying that the measures will almost certainly "open the credit faucet, but perhaps they have come too late."
The problem, he said, was that they may not restore the confidence of households and businesses while the economy is in recession.
"We are looking at a gloomy economic forecast for the end of this year and the beginning of 2009," he said. "So you could have a situation in which credit is available but few will take advantage of it because they are afraid to invest or spend."
Debroissia said that governments may be forced to undertake measures to "re-launch the twin motors of economic growth -- household spending and investment" -- such as state investment in research and development.