Peugeot Gets Rescued
It was clear that Peugeot would eventually turn into France's version of GM – 'government motors', French style. Since the government would not allow Peugeot to close loss-making plants in what will ultimately probably prove to be a vain attempt to 'save jobs', it was now forced to take the next logical step – namely to guarantee part of the company's debt. In the process, the government will naturally get more control over the company, which is in keeping with the Hollande administration's 'Zwangswirtschaft' program.
“The French government stepped in to rescue PSA Peugeot Citroen, Europe’s second-largest carmaker, by guaranteeing as much as 7 billion euros ($9 billion) in new bonds in exchange for greater influence over company strategy.
The state and workers will each receive a seat on the board of directors, and an outside committee will be set up with veto power over any “significant” changes in Peugeot’s operations, the French Finance Ministry said today.
Peugeot needs the French state backing for its banking unit to keep down borrowing costs and offer customers competitive financing rates. Underscoring the urgency of the funding need, the carmaker predicted today that debt is set to increase 20 percent more this year than it forecast in July.
“The state will want to see this business run more in the interest of government, rather than in the interest of the shareholders,” said Erich Hauser, a Credit Suisse analyst with a neutral rating on the shares.
The government and workers will receive board seats? Are they sure this is going to work out? We believe that this latest socialistic experiment is highly likely to turn into a bottomless pit for France's tax payers.
Not surprisingly, competing car makers in other European countries are rather unhappy that an inefficient competitor is kept on artificial life support. They are perfectly right to complain. To keep companies that are not competitive artificially afloat harms the economy at large, but it is especially detrimental to more able companies in the same branch of industry.
However, the French government insists that it is actually not providing aid to Peugeot, and will therefore not run afoul of EU regulations that forbid such state aid. It is not giving aid, it is merely providing 'support'.
“I see that certain of our competitors don’t see it with a friendly eye, but when the terms are presented you’ll see that it’s not state aid, but support,” Chatillon said at a Paris press conference. “This a very strong support from the state but not an aid in the technical sense. There is no reason to have difficulties in Brussels.”
You couldn't make this up if you tried.
Hang on, it gets even better. Guess who Peugeot is now in an alliance with to produce new cars consumers will – hopefully – want? You guessed it….GM, the original 'government motors':
“The French automaker earlier this year entered into a strategic alliance with General Motors Co. in which GM became the second-biggest stakeholder. Peugeot said today it’s making progress with GM on the alliance and the two have selected four vehicle projects to work on together.”
Color us doubtful as to the likelihood of success.
Peugeot's share price: a never ending horror show – click for better resolution.
Peugeot Rescue Part of 'Quiet Bank Bailout'
Bloomberg reports that the Peugeot rescue, which is actually bailing out the company's financial arm, should be seen as part of France's 'quiet bank bailout', which by now amounts to more than €60 billion in toto ($78 billion).
The government yesterday said it will guarantee 7 billion euros in new bonds by Banque PSA Finance, the consumer-finance unit of Europe’s second-largest carmaker. The aid comes on top of support for Dexia SA (DEXB), the French-Belgian municipal lender, and for home-loans company Credit Immobilier de France.
“These bank rescues on the quiet should be getting more critical market attention,” said Bill Blain, a strategist at Mint Partners Ltd. In London. “We don’t know what’s next, but it certainly demonstrates that some of the specialized financial institutions remain very, very weak.”
The third such French bailout in the past year coincides with President Francois Hollande’s push for a European banking union and a common euro-area bank supervisor to break the link between lenders and governments. It also comes as the French government struggles to keep a pledge to cap its budget deficit at 3 percent of gross domestic product next year. Specialized lenders have been hit by a liquidity crunch as a result of Europe’s debt crisis, leaving them with rising funding costs. Banque PSA, Dexia and Credit Immobilier de France all tapped the European Central Bank’s long-term loans.”
It's beginning to add up even before any of the bigger banks are in trouble.
A chart of net assets held by European banks as a percentage of host country GDP. The 'big three' French banks alone held assets amounting to 200% of France's GDP as of FY 2011. In the meantime they have reduced their 'risk weighted' assets, but have vastly increased their 'trading assets', i.e., mostly derivatives (chart via GS, zerohedge) – click for better resolution.
Whether by coincidence or not, a downgrade of France's banks was announced immediately thereafter – in what could perhaps be called less than fortuitous timing.
French Banks Downgraded
Standard and Poors has increased its 'economic risk score' for France from 2 to 3 (whatever that means…), and hence has decided to downgrade the credit ratings of a number of French banks as well as putting several banks on 'negative watch'. Among the 'big three', only BNP Paribas was downgraded, while Credit Agricole and Societe Generale got away with being put on negative watch for now. The .
Inter alia S&P reasons that the French housing bubble may come under pressure, however, it reckons that this will only have a negligible effect on France's banks (S&P: “We also consider that the economic environment for banking will become more demanding as the French housing market is in the process of correcting a build-up in housing prices, although we expect the impact on banks and the overall economy should be relatively limited”).
We wish all concerned good luck with that assessment, given that it would be a 'first'.
“After zooming 120% from 2000 to 2008 and briefly dipping 5.6% in 2009, French property prices have continued their inexorable march higher since late 2009. French property prices are highly overvalued, currently valued at 135% of their historic price-to-income ratio and 150% of their historic price-to-rent ratio.  Though property prices are strongly rising throughout France, the French housing bubble is largely driven by the Paris region, where prices have jumped 18% in 2010 and approximately 10% in 2011, up more than 40% since 2005. Some posh districts in Paris have risen at a 27% rate in 2011.
France’s housing bubble was goosed by a 2009 law that was meant to stimulate the housing market by creating a significant tax incentive for buyers. Mortgage rates that plunged from 6.5% in late 2008 to 3.5% in 2011 were another major catalyst for soaring property prices, causing fixed-rate mortgage lending to increase by 73% by early 2011.
Surprise, another real estate bubble egged on by too low interest rates and a 'law meant to stimulate the housing market'. Prices in terms of rental income 150% above trend? Mortgage lending up 73%? What could possibly go wrong?
French house prices by region since 1965. The mini-bubble of the late 1980's has turned into the major bubble of the 2000d's. (chart via thebubblebubble.com) – click for better resolution.
Nothing to see here, as they say.
Meanwhile, France's business climate is doing the socialist two-step to Zool. It is worth considering that previous declines in the business climate survey tended to coincide with falling house prices:
We would have raised the 'economic risk score' too. France's manufacturers fall into a state of double-plus unhappiness (chart via V. Flasseur/Reuters)
It seems possible that the bank bailout will eventually morph from a quiet into a somewhat less quiet one.
Charts by: bigcharts, , V. Flasseur/Reuters, Goldman Sachs/zerohedge
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