VZCZCXRO3044
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #1951/01 2980759
ZNR UUUUU ZZH
O 240759Z OCT 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4621
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 PARIS 001951 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL FR
SUBJECT: FRANCE IN THE FINANCIAL CRISIS 
 
REF:  22 OCTOBER JKESSLER EMAIL TASKING 
 
¶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 
Crisis 
- - - - - - - - - - - - - - 
 
¶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 
Luxembourg. 
 
¶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 
well-focused. 
 
¶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 
areas. 
 
STAPLETON