Commentary on Political Economy

Wednesday, 9 December 2020

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French economy and the pandemic: ‘It’s the calm before the storm’

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It took the chief executive of Europe’s biggest car rental company just over an hour to convince France’s industry minister that it needed a bailout.

Europcar’s chief executive Caroline Parot carried a grim message in March just before the Covid-19 pandemic forced the country into lockdown: as travel bans risked crushing the business, without access to cash to cover fixed costs, Europcar could be in real trouble.

“The bottom line is that we have no more customers,” Ms Parot told minister Agnès Pannier-Runacher. 

Ms Parot was one of the first chief executives to make such a plea in the monolithic building that houses France’s finance ministry. She would not be the last.

As shops closed and infections climbed, a parade of French companies clamoured for liquidity to get themselves through an unprecedented crisis.

In response, the government quickly pledged up to €300bn to a state-guaranteed loan programme, mobilising means rarely seen outside of wars, aimed at preventing the pandemic from crashing the economy.

France Covid-19 aid keeps insolvencies in check. Chart showing Number of insolvencies (’000) for France, Germany, Spain and England and Wales

Dubbed the prêt garanti par l’état (PGE), the scheme aimed to funnel cash to companies to help them through what was then hoped would be a short lockdown to slow the spread of the virus. Along with a generous furlough programme, the PGE was the most potent weapon in France’s arsenal as it fought to prevent the pandemic from causing mass unemployment and bankruptcies.

Across Europe, the coronavirus pandemic forced one of the most intense periods of state intervention seen in decades. France was one of the countries best prepared to act, given its long history of economic dirigisme and the strong ties between the bureaucracy and industry.

Ms Pannier-Runacher was among a small group of bureaucrats who piloted the response using WhatsApp groups, Zoom calls and a committee buried in the bowels of the finance ministry that made life-and-death calls about the worst-off companies.

As one of the first applicants, Europcar was a test case for the government and the banks as they thrashed out the loan programme. Ms Pannier-Runacher threw her weight behind saving it.

“We were not going to let this company go to the wall since it is well managed, offers a service that France needs and employs around 8,000 people,” she says. “The government had to do something.”

Europcar’s chief executive Caroline Parot told the government in March: 'The bottom line is that we have no more customers'
Europcar’s chief executive Caroline Parot told the government in March: 'The bottom line is that we have no more customers' © Panther Media GmbH/Alamy
Europcar won the support of CIRI, which coaxed banks to grant the company a €220m loan in May with few strings attached
Europcar won the support of CIRI, which coaxed banks to grant the company a €220m loan in May with few strings attached © Regis Duvignau/Reuters

With many economies weakening again amid an infection resurgence and mass vaccination still months off, governments are urgently evaluating what policies have worked so far, how much stimulus to continue extending, and whether to leave some companies and industries to fend for themselves.

France’s experience with the PGE programme is illuminating because it shows the limits of cheap loans alone as a way to help companies survive as the crisis lengthens.

The state is already debating whether more radical steps are needed, such as cancelling PGE debt, converting some into longer loans indexed to company performance or even taking stakes in some struggling companies. The challenge will be finding solutions that work not only for big firms but the more than 580,000 smaller businesses that have received loans. France will also have to get approval from Brussels, as it did for the PGE scheme, to ensure that any modifications do not break state aid rules.

“Putting this huge amount of liquidity on the table . . . has been a success,” says Philippe Martin, chairman of the French Council of Economic Analysis. “But the big question now is the next step. It’s not enough to just freeze the economy.”

France’s Covid-19 economic arsenal. Waterfall chart showing amounts deployed to aid programmes (€bn)

Trading blow

Across Europe, governments have used a mix of loans, furlough schemes, rent and tax holidays and grants to try to protect citizens and businesses.

But some entered the crisis with healthier economies than others, allowing them to spend more. Spain has mobilised €53.8bn in direct additional government spending and cancelled taxes since the crisis began, according to think-tank Bruegel, but that is less than a quarter of Germany’s “bazooka” of €284bn. On that same measure, Italy marshalled a response roughly half of France’s €124bn.

In France, the aid cushioned the blow of the first phase of the pandemic. Insolvencies this year are roughly 40 per cent below 2019 levels, according to UBS, while unemployment rose by about 1 per cent to 9 per cent overall by the end of September. 

But job losses are now accelerating. More than 35,000 lay-offs have been announced since the start of September, according to Trendeo, a Paris-based consultancy, while government figures show that average weekly lay-offs are some 80 per cent higher since September than from March to the end of August. 

Some deterioration is down to the second lockdown imposed in late October, forcing shops, gyms, theatres and restaurants to close. Officials pledged more help by expanding existing aid schemes like the PGE and introducing new ones, such as tax credits to landlords who grant rent holidays to commercial tenants. 

Nevertheless, many small business owners reacted with deep anger. In Toulouse and Bordeaux they held theatrical protests where they dressed in black and played dead in front of the town hall.

Their cri de coeur was clear: they did not want more aid, especially not debt that they could not pay back. They just wanted to be able to trade, especially during the key Christmas shopping season.

The situation has begun to test the limits of President Emmanuel Macron’s vow — first made in March and then often repeated — that “everything will be done to protect our workers and our companies, whatever the cost.”

Small companies receive lion share of PGE scheme funds. Pie chart showing breakdown of funds granted (%) by PGE scheme

Some critics of France’s approach say the reckoning for weak businesses has only been delayed, not prevented. They also pointed out the risk of creating so-called zombie companies which, hampered by high debt and weak profitability, cannot invest and create jobs. If the money hose was kept on too long, it could actually weaken France’s economy.

“It’s the calm before the storm,” says Mr Martin. “Eventually we’ll have to see business fail, and we want some to fail as that’s normal and healthy for an economy, but the question is when and how to manage it.”

Staying afloat

The PGE scheme was born out of a flurry of meetings as France headed into its first lockdown in March.

Many of the French officials working on the economic response to the pandemic had also been in government during the 2008 financial crisis. They feared that financial markets would freeze up as they did then, turning a liquidity crisis into a solvency crisis.

To send a strong message that the government would backstop the economy, they pushed for an eye-catching €300bn for the loan scheme. “We didn’t know then financial markets would remain open,” says one top Elysée official. “We wanted to prevent irreversible consequences from a temporary crisis.”

To get money out the door quickly, the government enlisted the banks to evaluate applications and administer the loans. Companies of any size or type could ask for loans worth up to three months of sales based on 2019 performance, or based on wage bills for new companies.

France’s industry minister Agnès Pannier-Runacher, left, who threw her weight behind saving Europcar 
Rescue team, from left: industry minister Agnes Pannier-Runacher, economy minister Bruno Le Maire, deputy public accounts minister Olivier Dussopt and deputy small business minister Alain Griset at the Elysée in July © Benoit Tessier/Reuters

No capital payments were due in the first year and the loans could run for up to five years. In case of default, the state would cover between 70 to 90 per cent of the loan amount, thus protecting the banks.

As officials rushed to send funding to struggling businesses, they found themselves negotiating the early loan applications, such as from Europcar and retailer Fnac-Darty, while the programme itself was still being finalised.

Ms Pannier-Runacher likened it to “playing a tennis match while you were still painting the lines on the court”.

The government had a secret weapon to help on tough cases: a little-known finance ministry committee called CIRI. Created in 1982, its role was to mediate between companies in danger of collapse and their lenders. Led by a restructuring expert called Louis Margueritte, CIRI has been busy with about 60 new dossiers this year, up from the usual 25 to 40.

When banks and companies fought over loan terms, CIRI had the influence to force a compromise, says one head of a French investment bank. “Sometimes you need someone with a big stick . . . who is able to say ‘Do you want to piss off the French state? Yes or no?’ That’s the job of CIRI.”

The PGE money began to flow in April, barely a month after the programme was announced, and so far loans worth €126bn have been issued.

Small companies applied by going directly to their banks and presenting a business plan. The government guarantee was automatic, and for companies with fewer than 5,000 workers and less than €1.5bn in sales, it would cover 90 per cent of defaults.

Nearly 90 per cent of the 622,167 loans given out to date have gone to businesses with fewer than 10 employees, with an average loan size of €91,000. Only 2.8 per cent of all eligible applications were rejected by the banks.

France has been one of the worst hit in the G7 by the pandemic. Chart showing change in GDP, Q1-Q3 2020 vs same period in 2019 (%) in G7 nations, only Italy and UK fared worse

Loans to big companies had to be approved by the finance ministry because they were often politically significant and concerned more jobs. There have been 40 such loans at an average size of €379m. Some got far more: €5bn to carmaker Renault, €4bn to airline Air France, and €1bn to shipping group CMA-CGM.

The state granted its guarantee to most borrowers with no strings attached. But it did order the biggest companies not to pay dividends or buy back shares in 2020, and imposed environmental targets on Air France. 

As the money reached corporate accounts, chief executives had to decide what to do with it. Some used it to pay overdue rent or urgent bills. Fnac-Darty, an electronics, books and home appliances retailer, squirrelled away a €500m loan obtained in mid-April as it waited to see the lockdown’s damage. Then something surprising happened: online sales began to boom so it did not need to spend the PGE immediately. Finance director Jean-Brieuc Le Tinier was still glad to have it: “It reassured everyone. We paid all our vendors on time.”

Fer à Cheval, a 164-year-old Marseille soapmaker, was another that did not need to spend its loan to survive. Owner Raphaël Seghin saw his profits jump 20-fold this year to almost €1m as demand for cleaning products spiked. He plans to use his €450,000 loan to replace rusted metal machinery on a soap production line.

According to business lobby Medef, many companies are treating their PGEs as a pandemic security blanket. In a recent survey of 989 firms, 60 per cent still had at least three-quarters of the money left.

Loans and lay-offs

Others were forced to spend their loans almost immediately. Conforama, a heavily indebted furniture retailer owned by South African group Steinhoff International, was already fragile before the pandemic. It used a chunk of its PGE to pay for a lay-off plan affecting 1,900 workers that was negotiated with its unions in late 2019.

Conforama’s case also showed how much power the state and CIRI wielded. When the first lockdown began, the group asked for a €320m loan but its banks were wary of lending more without Steinhoff contributing capital. They pushed for any fresh loans to be conditional on Conforama selling itself to BUT, France’s number two player.

Soapmaker Fer à Cheval did not need to spend its loan to survive, after profits jumped 20-fold this year to almost €1m as demand for cleaning products spiked
Soapmaker Fer à Cheval did not need to spend its loan to survive, after profits jumped 20-fold this year to almost €1m as demand for cleaning products spiked © Donte Tatum/Alamy
During the second lockdown French officials pledged more help to businesses such as restaurants by expanding existing aid schemes like the PGE and introducing new ones, such as tax credits to landlords
During the second lockdown French officials pledged more help to businesses such as restaurants by expanding existing aid schemes like the PGE and introducing new ones, such as tax credits to landlords © Ian Langsdon/EPA-EFE

The negotiations dragged on for months before CIRI brokered a complicated solution in which Steinhoff agreed to sell Conforama France to BUT’s parent Mobilux. Mobilux would in turn inject €200m in capital and €50m in loans into the business, unlocking €300m in state-backed loans. 

Asked if CIRI had gone too far in engineering consolidation, Mr Margueritte defends the approach. “We’re here to advocate for the best solution to protect jobs and economic activity. That can be either with an existing shareholder . . . or with a new one or another structure,” he says. “There are no taboos.”

CIRI was also involved in what was the most contentious PGE loan — Europcar.

The banks knew that concessions they granted the rental company would set a precedent, so they pushed hard for creditors to take losses. In a tense showdown, two of France's biggest banks, Société Générale and BNP Paribas, warned Mr Margueritte that the PGE alone would not solve the company's problems. Europcar resisted and won the support of CIRI, which coaxed the banks to grant the €220m loan in May with few strings attached.

La Defense, Paris. More than 35,000 lay-offs have been announced in France since the start of September
La Défense, home of French big business: there have been 40 loans to big companies at an average size of €379m © Nathan Laine/Bloomberg

But over the summer it became clear that Europcar’s business was worse off than Ms Parot had feared when she initially turned to the finance ministry. With tourists thin on the ground, the group quickly burnt through its PGE. 

In September, it was forced into the debt restructuring talks it had hoped to avoid. Europcar agreed in late November to give up over 90 per cent of its equity to its creditors in exchange for them wiping out money they were owed and injecting cash.

“We couldn’t keep fighting two battles, the pandemic and the restructuring, at the same time,” says Ms Parot, adding that Europcar could now start to rebuild its business.

Nevertheless, Europcar faces more difficult times ahead and may have to close outlets and lay off staff.

That threat hangs above many French companies, especially small ones hard hit by the second lockdown. Shops were allowed to reopen on November 28, but bars and restaurants will have to wait until January 20 to know their fates.

David Marciano, the owner of La Piscine bar in the north of Paris, worries that people will party over the holidays and further delay his reopening. “I am scared there will be a third wave,” he says.

His unspent €100,000 PGE is waiting in reserve. Mr Marciano is sure of one thing: he will not be taking on any more debt.

“I’m not going to pile PGE on top of PGE. This money isn’t a gift.”

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