French’s plan to recapitalize its banks has been blocked by EU

The French government reacted furiously to the Commission’s argument tied with French’s plan to shore up its six main retail banks capital over injecting cash to the banks’ balance sheet. EU competition commissioner has blocked the plan and was arguing “They have to apply the same criteria to everyone . . . support should be sufficient to offset the negative impact of the current financial crisis and no more”. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.

Christine Lagarde, French finance minister, persuaded Neelie Kroes, EU competition commissioner, today to lift her veto on France’s €10.5bn ($13.3bn) support package but Ms Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

Here is from FT.com:

French intended to recapitalise all its lenders at the same time to ensure they did not tighten credit to business and households. Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.

The finance ministry wanted to provide €10.5bn in subordinated loans to BNP Paribas, Société Générale, Crédit Agricole, Caisse d’Epargne, Banque Populaire and Crédit Mutuel. In return, the banks agreed to increase the stock of credit to households, business and local government by 3-4 per cent in 2009.

French officials said they accepted the argument that banks rescued from collapse by injections of public money, such as the UK’s Northern Rock or Dexia, the Franco-Belgian lender, should have to wind down their loan portfolios and eventually sell off their assets.

However, France’s six high-street banks were fundamentally sound but were under pressure from the markets to bolster their balance sheets, officials said. They added that EU leaders and the Commission endorsed this preventative recapitalisation approach in October.

The French plan is one of a number of banking aid measures notified to Brussels but still not approved. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.

A number of aid packages to individual institutions, such as that proposed for Germany’s Commerzbank, also remain under discussion.

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Sources :

FT.com: Brussels blocks French bank bail-out, November 28 2008 18:36

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