FINANCING FRANCE'S RECOVERY

UNCLAS SECTION 01 OF 03 PARIS 000287 SENSITIVE SIPDIS STATE FOR EEB/IFD/OIA AND EUR/WE E.O. 12958: N/A TAGS: EINV EFIN ECON PREL FR SUBJECT: FINANCING FRANCE'S RECOVERY REFS: A) STATE 4706 B) 08 PARIS 1951 C) PARIS 81 D) PARIS 212 ¶1. (SBU) SUMMARY: As EU president last fall, President Sarkozy pressed unsuccessfully for a coordinated European economic stimulus. The best he could get was a commitment to national efforts in the range of 1.5 to 2 percent of GDP. At home, Sarkozy wasted no time in acting on his proposals. Today, France has up and running a substantial program to provide government credit to enterprises through the banks and a domestic sovereign investment fund to provide equity. Packages have been announced for the auto sector which directly and indirectly employs 10 percent of the workforce. More recently, after consultations with "social partners," Sarkozy announced EUR 2.6 billion in demand-side measures for the most vulnerable part of society including tax cuts for low wage earners and a boost in unemployment benefits. SFEF - Financing the Economy via the Banks -------------- ¶2. (U) In October, the GOF established the Corporation for Financing of the French Economy (Societe de Financement de l'Economie Francaise, or SFEF),owned 34% by the state and 66% by the banks, to refinance the medium-term activities of credit institutions established in France. Armed with a state guarantee, SFEF was to sell bonds in the financial markets and funnel the proceeds to banks for on-lending, overcoming banks' lack of liquidity and unwillingness to lend. The objective was to ensure access to credit to modulate the economic slowdown and aid recovery. ¶3. (SBU) Former IMF Managing Director Michel Camdessus was brought in to run the SFEF (along with only half a dozen personnel). Camdessus told us February 17 that the SFEF was serving as a "credit pump" with French banks acting as its distribution points. The SFEF had issued 23 billion euros in bonds between November 2008 and January 2009. Banks can access the funds, he said, provided they are in compliance with prudential reserve requirements; commit to expanding their loan books by 3% to 4% in 2009; and accept governance rules that include restrictions on remuneration of executives and traders. Participating banks pay 30 basis points for the GOF guarantee on top of risk-adjusted market rate and are required to deposit the underlying collateral on the loans they extend with the SFEF. Collateral is rigorously and independently evaluated on a market basis. Camdessus has announced that SFEF will raise 50 - 70 billion euros in financial markets in 2009. ¶4. (U) Participating banks are required to make monthly reports to the government's Credit Observatory, particularly on lending levels, and an oversight committee including representatives of Parliament's finance committees and the Bank of France periodically review compliance with conditionalities. (President Sarkozy also created a special "Credit Mediator" to work with regional prefects and local branches of the Bank of France to encourage continued bank lending to businesses.) ¶5. (SBU) In addition to providing funding through banks, the GOF reserves the right to "direct" up to 20 percent of SFEF borrowing to designated recipients. Camdessus told us that he has nothing to do with this process, which we believe is run directly by the Ministry of Economy. Thus the credit arms of auto producers Renault and Peugeot/Citroen were allowed to participate in SFEF financing at a level of one billion euros in January, with another billion to be made available before year's end. Five billion euros are to be made available to finance purchases of Airbus aircraft via prime lenders Calyon, BNP, Societe Generale and Natixis. (The GOF argued that banks' unwillingness to lend despite GOF credit guarantees necessitated this action. They note that ExIm Bank also has direct export credit lending authority.) The retailer Carrefour has also signed an accord with the GOF to obtain financing from SFEF, through Carrefour's consumer credit arm. Strategic Investment Fund -------------- ¶5. (SBU) Created amidst international controversy over its potentially protectionist purposes, the French "Strategic Investment PARIS 00000287 002 OF 003 Fund" (French acronym FSI) has a mandate to invest long-term in innovative private sector firms, and help keep key jobs and technology in France. The FSI was announced by Sarkozy on November 20 and was incorporated as a subsidiary of the government-sponsored Caisse de Depots et Consignations (CDC) in December 2008 with initial capital of 20 billion euros. The GOF and the CDC each contributed 7 billion euros in equity shares and 3 billion euros in cash. The FSI CEO and other leading officials are largely drawn from French industry. In a second phase, the FSI is to be opened up to other investors, private and/or foreign, but the state will retain a blocking minority share of at least 34%. The CDC chief of staff explained to us that the CDC is uniquely positioned to operate an investment fund on sound business investing principles to act in the general interest. He expected that the FSI would operate fully independently and would be overseen by the National Assembly, as is the case with the Caisse itself. He also pointed out that the FSI has absorbed a similar but smaller operation "France Investissements" that has been operating for two years with one billion euros invested in either innovative or rapidly growing small and medium enterprises and in SME investment funds. Where is the FSI Investing? -------------- ¶6. (U) Prior to FSI's actual creation, the President promised aeronautics firm Daher an 85 million euro investment to support research and development. On January 20, FSI signed a memorandum of understanding with auto producers, Renault and PSA Peugeot Citroen, to co-finance a 300 million euro fund (recently increased to 600 million) to provide capital for smaller automotive suppliers and grow such companies to a European or global scale. In advance of investments from that sub-fund in small suppliers, in mid-February FSI took an 18.7 million euro position in the voting stock of major automotive system producer Valeo, which brings FSI's total equity share in Valeo (counting equity "inherited" from CDC holdings, to 8.33%. Thomson, the troubled media equipment producer, is said to be applying for similar support, but FSI board members have reportedly suggested Thomson settle its problems with creditors and shed non-strategic subsidiaries first. There have also been questions about an investment in Thomson due to the large proportion of its business activities in the United States. The Fiscal Stimulus Package -------------- ¶7. (SBU) In early December, President Sarkozy launched a 26 billion euro recovery package which included 11 billion in public investment, 11 billion in tax-related cash-flow assistance to business, and 4 billion in investment by government-owned enterprises (rail, post, energy). This initial program was supplemented by a multi-billion euro package of measures for the automobile sector that includes loans to major auto manufacturers (ref D). The government's 11 billion euro public investment is to be used in some 1000 projects throughout the country, chosen for their positive impact on employment and public infrastructure, particularly when they can begin immediately. Patrick Devedjian, a Sarkozy loyalist and until recently, head of the President's UMP party, was appointed Economic Recovery Minister under the Prime Minister and is overseeing this spending. His staff told us that their objective is to commit 75% of the funds in 2009. The first projects approved in February, receiving 1.4 billion euros, include military procurement (amphibious vessels, armored vehicles), refurbishment of military installations and university buildings, construction of 70,000 low-cost housing units, and road and port renovations. The Supplemental Social Package -------------- ¶8. (U) Following a February 18 "summit" with representatives of employers and unions, President Sarkozy announced an additional 2.6 billion euro "social" package targeting lower income families, the temporarily unemployed and youth. The plan includes: --an income tax cut for some 4 million low-to-middle income households; PARIS 00000287 003 OF 003 --an unemployment benefit hike guaranteeing 90% of net pay for those facing temporary layoffs (chomage technique) such as in the automobile sector; --a one-time payment of 500 euros for job seekers under 25 who don't qualify for unemployment benefits; --a 200 euro voucher to subsidize home care for the disabled; and, --an additional 150 euro-per-child school allowance for about 3 million families. The government has also set up a "Social Investment Fund" to finance vocational training of workers with an initial endowment of 800 million euros, possibly growing to 3 billion euros. ¶8. (SBU) Comment: While the credit guarantee system is functioning, the equity and public investment aspects of the recovery plan are in their early days and will take some time to ramp up. One private sector contact estimated last month that of the 26 billion euros in the fiscal stimulus package, only 3 billion actually represented new money, as opposed to accelerated investment from 2010 or 2011 funds. On the other hand, we are relatively confident that the senior officials charged with making these programs work are more than capable of getting money out the door quickly, both to the public and private sectors. The more interesting question is whether the GOF will go beyond the limited initial funding of the FSI and open participation in its national champions to foreign capital. PEKALA