Nicolas Lecaussin: What's the Matter With the French Banks? - WSJ.

com

Page 1 of 2

Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com See a sample reprint in PDF format. Order a reprint of this article now

OPINION EUROPE

SEPTEMBER 13, 2011

What's the Matter With the French Banks?

Whether the market's worst fears are realized or not, the financial system maintains too close a relationship to the state.
By NICOLAS LECAUSSIN

"We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore." He's not the only one worried. Socit Gnrale has lost 22.5% of its value since the beginning of the summer. In early September, BNP released a statementin English, which is highly unusualexplaining that it has abundant dollar liquidity and that BNP has nothing to worry about, unlike other banks. France's three biggest banks have been the subject of whisper campaigns about their solvency throughout the summer. On the surface at least, the concerns are hardly groundless. BNP, Socit Gnrale and Crdit Agricole together hold nearly $57 billion in Greek sovereign and private debt, versus $34 billion held by the largest German banks and $14 billion at British banks. And then there is Spain and Italy. French banks held more than 140 billion in total Spanish debt and almost 400 billion in Italian debt as of December, according to the latest figures from the Bank for International Settlements. If either of these governments were to default on their debts, their banking systems could collapse and take the French system along with them. BNP, Socit Gnrale and Credit Agricole all say that their finances are in order and the market worries are unfounded. But it's difficult for the BNP executive to hide his concern. "Look at the French banks' debt holdings versus those of U.S. banks," he continues. "The total debt of the three big U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of BNP, Crdit Agricole and Socit Gnrale come to 4.7 trillion, or 250% of French GDP." Now that the situation is bordering on catastrophe, analysts are suggesting that the government is set to start nationalizing France's banks. The banks have remained silent on the matter, and the government denies this talk. That's just as wellthe last time the French state intervened in the banking system in a big way, the results were disastrous. As recently as the 1980s, most French banks were owned by the state, and by the 1990s the sector was bordering on bankruptcy. The size of the French banking sector shrank by nearly 50% during the decade, while the banking sectors in other countries such as Britain and the U.S. grew by 39% and 50%, respectively. The most famous case of that time was that of Crdit Lyonnais, which was plagued by mismanagement throughout the 1980s and 1990s Images.com/Corbis until it shifted its debts and liabilities into a new state-owned company, the Consortium de Ralisation. In 2003 Crdit Lyonnais was taken over by Crdit Agricole, but in July 2008

http://online.wsj.com/article/SB10001424053111904353504576566191261182836.html 13/09/2011

Nicolas Lecaussin: What's the Matter With the French Banks? - WSJ.com

Page 2 of 2

its bills came due anyway. An arbitration court ordered the Consortium de Ralisation to pay 240 million to the liquidators of the Bernard Tapie group, along with 105 million in interest and 45 million in moral damagesso, a total of 395 million for just one erstwhile borrower. Meanwhile, the SdBO (Western Bank Corporation), a subsidiary of Crdit Lyonnais, lent sums to the Tapie family that added up to more than two-and-a-half times the bank's total capital. French taxpayers later had to cover these sums, following protracted legal proceedings. All told, Frenchmen paid out more than 15 billion for the mismanagement of Crdit Lyonnais over the years. Then there was the case of French mortgage lender Crdit Foncier, whose taxpayer-backed losses came to 2 billion. The Hervet bank (now part of the HSBC group) announced the first losses in its history after its 1982 nationalization. The International Bank for West Africa (BIAO) was on the verge of default in 1988 when it was taken over by BNP. These and other disasters were brought on by the bank nationalizations of the early 1980s. But the subsequent privatizations have not done much to radically change the composition of French banks' boards. They are still dominated by the alumni of France's famous ENA, the Ecole Nationale d'Administration, and by officials who have worked at the Ministry of Finance. The revolving door between the government and the banks is a particularly French one. A study by the Management Institute at the Universit de La Rochelle finds that between 1995 and 2004, banks that were administered by government-linked technocrats were in greater total debt than those that were not. Whether the market's worst fears are realized or not, French banks certainly maintain an all too close relationship to the state. This opaque system doesn't offer outsiders much visibility, save for the knowledge that indebted banks and an indebted French state intend to continue to cover each other, no matter the cost and on taxpayers' backs if they must. If U.S. money-market managers no longer trust the French system, this is a glaring reason why. The fastest way to regain their trust would be to end this system. Mr. Lecaussin is director of development at France's Institute for Economic and Fiscal Research (IREF).

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com

http://online.wsj.com/article/SB10001424053111904353504576566191261182836.html 13/09/2011