Cablegate: France in the Financial Crisis

DE RUEHFR #1951/01 2980759
O 240759Z OCT 08



E.O. 12958: N/A


1. (U) Per ref tasking, this message provides an
initial read on France and the financial crisis,
including immediate credit/liquidity concerns, the
longer macroeconomic outlook, government actions in
response to the crisis, expected domestic impact and
possible effects on U.S.-French relations.

Immediate Concerns Stemming from the Financial
- - - - - - - - - - - - - -

2. (U) Following a virtual freeze in interbank
lending early in October, interbank interest rates
began to ease at mid-month and regulators indicate
that volumes are picking up. While the European
Central Bank cut its key interest rates by 50 basis
points, interbank interest rates have decreased 30
basis points. Steps taken by the French government
and its European partners to address liquidity
problems in the banking system and restore
confidence have indirectly contributed to unblocking
the interbank market.

3. (U) The outstanding amount credit in the French
economy (1,845 billon euros or USD 25,827 billion)
increased at a 10.2 % annual rate in August,
compared to 14.2 % in the first months of 2008. The
amount of credit to households in August was up 8.3%
compared to the summer 2007, despite a sharp decline
in home mortgage loans (down 26.3% y/y in Q3 2008).

4. (U) As business conditions have worsened and
economic growth has flagged, the number of companies
in bankruptcy has jumped 17.2 % to 11,400 in the
third quarter, compared with a year earlier. All
sectors are affected. According to the research
firm Altares, the number of bankruptcies could reach
53,000 in 2008, a ten-year record. One in four
bankruptcies resulted from cash-flow problems.
French business is complaining that banks are
cutting off lines of credit when credit insurers
downgrade company ratings, sometimes without notice.

Longer term macroeconomic effects
- - - - - - - - - - - -

5. (U) Economic growth is slowing to a near halt.
The Bank of France puts provisional Q3 GDP growth at
-0.1% and the IMF projects 0.2% growth in 2009. An
official survey of status of French industry shows
the bleakest outlook since the depths of the 1993
recession. Overtime hours worked are down and
unemployment has begun to increase (currently 7.6%)
for the first time since 2003. Nevertheless,
consumer spending rose slightly in Q3 after showing
zero growth in Q2.

Actions to Address the Financial Crisis
- - - - - - - - - - - -

6. (U) In late September, President Sarkozy called
for an international summit on restructuring of
international financial and economic institutions (a
"new Bretton Woods") to deal with the world
financial crisis and prevent future crises. He
convened his European G-7 counterparts to attempt to
reach agreement on an approach to the crisis, in
advance of the G-7 Finance Ministers meeting in
Washington. On October 12, he invited UK Prime
Minister Brown and leaders of the Eurozone countries
to Paris to formulate a coordinated approach to
shoring up banks and guaranteeing deposits. He
obtained EU-wide endorsement for this approach, and
for holding a summit on restructuring the
international financial architecture, at the October
15 Q 16 European Council.

7. (U) Based on the Eurozone agreement of October
12, the French government passed legislation that
made available up to 320 million euros in guarantees
for medium-term financing (up to five years) for
banks, and another 40 billion euros for
recapitalization. The financing is channeled
through a cooperative limited stock company, with
public participation, that will issue its first bond
the week of October 27. Thanks to a bridge loan it
will extend its first credits this week. The
recapitalization fund covers the 3 billion euro

PARIS 00001951 002 OF 002

capital injection for the Franco-Belgian bank Dexia,
commensurate with the terms of the intergovernmental
agreement signed on October 8 with Belgium and

8. (U) In addition, the government and the six
largest French banks announced a plan on October 21
that would inject 10.5 billion Euros into their
capital by end of year. The official objective is
to enable the banks to continue to supply credit to
households, small businesses and groups affected by
the financial crisis. But the move will also
strengthen the banksQ balance sheets, thus improving
their ability to raise funds on the open market.

Domestic Political and Economic Implications
- - - - - - - - - - - -

9. (SBU) President Sarkozy has acted decisively in
France, and as president of the European Council,
over which he presides until the end of the year.
While economic stagnation potentially complicates
his ability to press forward with reform, his
financial sector and international initiatives have
boosted his stature domestically, and may bring his
presidency additional political capital.

Consequences for Bilateral Relations
- - - - - - - - - - - -

10. (SBU) French officials frequently make the
matter-of-fact observation that "this crisis didn't
start in France." But they consider it a global
problem and have sought a constructive approach in
resolving it together. Nevertheless, President
Sarkozy is going beyond the immediate and proximate
causes in his calls for reform of the international
financial system. His Gaullist economic instincts,
combined with his activism, will inevitably lead to
differences as the Summit process moves forward,
particularly for the remainder of the French EU
presidency. We will need to continue to consult
frequently with the French to keep our common agenda

11. (SBU) The economic slowdown is likely to further
exacerbate what is already a challenging budgetary
environment. While relaxation of budget strictures
is not out of the question, from defense to
development assistance the GOF will be under the gun
to rein in spending in areas that are important to
us. We will need to consider this as we build
assumptions about the burdens the French will or
will not be ready to assume in a number of critical


© Scoop Media

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