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RUEHKO/AMEMBASSY TOKYO 2931

UNCLAS SECTION 01 OF 03 PARIS 000287 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB/IFD/OIA AND EUR/WE 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PREL FR
SUBJECT:  FINANCING FRANCE'S RECOVERY 
 
REFS: A) STATE 4706 B) 08 PARIS 1951 C) PARIS 81 
D) PARIS 212 
 
¶1. (SBU) SUMMARY:  As EU president last fall, President Sarkozy 
pressed unsuccessfully for a coordinated European economic stimulus. 
 The best he could get was a commitment to national efforts in the 
range of 1.5 to 2 percent of GDP.  At home, Sarkozy wasted no time 
in acting on his proposals.  Today, France has up and running a 
substantial program to provide government credit to enterprises 
through the banks and a domestic sovereign investment fund to 
provide equity.  Packages have been announced for the auto sector 
which directly and indirectly employs 10 percent of the workforce. 
More recently, after consultations with "social partners," Sarkozy 
announced EUR 2.6 billion in demand-side measures for the most 
vulnerable part of society including tax cuts for low wage earners 
and a boost in unemployment benefits. 
 
SFEF - Financing the Economy via the Banks 
------------------------------------------ 
¶2. (U) In October, the GOF established the Corporation for Financing 
of the French Economy (Societe de Financement de l'Economie 
Francaise, or SFEF), owned 34% by the state and 66% by the banks, to 
refinance the medium-term activities of credit institutions 
established in France.  Armed with a state guarantee, SFEF was to 
sell bonds in the financial markets and funnel the proceeds to banks 
for on-lending, overcoming banks' lack of liquidity and 
unwillingness to lend.  The objective was to ensure access to credit 
to modulate the economic slowdown and aid recovery. 
 
¶3. (SBU) Former IMF Managing Director Michel Camdessus was brought 
in to run the SFEF (along with only half a dozen personnel). 
Camdessus told us February 17 that the SFEF was serving as a "credit 
pump" with French banks acting as its distribution points.  The SFEF 
had issued 23 billion euros in bonds between November 2008 and 
January 2009.  Banks can access the funds, he said, provided they 
are in compliance with prudential reserve requirements; commit to 
expanding their loan books by 3% to 4% in 2009; and accept 
governance rules that include restrictions on remuneration of 
executives and traders.  Participating banks pay 30 basis points for 
the GOF guarantee on top of risk-adjusted market rate and are 
required to deposit the underlying collateral on the loans they 
extend with the SFEF.  Collateral is rigorously and independently 
evaluated on a market basis.  Camdessus has announced that SFEF will 
raise 50 - 70 billion euros in financial markets in 2009. 
 
¶4. (U) Participating banks are required to make monthly reports to 
the government's Credit Observatory, particularly on lending levels, 
and an oversight committee including representatives of Parliament's 
finance committees and the Bank of France periodically review 
compliance with conditionalities.  (President Sarkozy also created a 
special "Credit Mediator" to work with regional prefects and local 
branches of the Bank of France to encourage continued bank lending 
to businesses.) 
 
¶5. (SBU) In addition to providing funding through banks, the GOF 
reserves the right to "direct" up to 20 percent of SFEF borrowing to 
designated recipients.  Camdessus told us that he has nothing to do 
with this process, which we believe is run directly by the Ministry 
of Economy.  Thus the credit arms of auto producers Renault and 
Peugeot/Citroen were allowed to participate in SFEF financing at a 
level of one billion euros in January, with another billion to be 
made available before year's end.  Five billion euros are to be made 
available to finance purchases of Airbus aircraft via prime lenders 
Calyon, BNP, Societe Generale and Natixis.  (The GOF argued that 
banks' unwillingness to lend despite GOF credit guarantees 
necessitated this action.  They note that ExIm Bank also has direct 
export credit lending authority.)  The retailer Carrefour has also 
signed an accord with the GOF to obtain financing from SFEF, through 
Carrefour's consumer credit arm. 
 
Strategic Investment Fund 
------------------------- 
¶5. (SBU) Created amidst international controversy over its 
potentially protectionist purposes, the French "Strategic Investment 
 
PARIS 00000287  002 OF 003 
 
 
Fund" (French acronym FSI) has a mandate to invest long-term in 
innovative private sector firms, and help keep key jobs and 
technology in France.  The FSI was announced by Sarkozy on November 
20 and was incorporated as a subsidiary of the government-sponsored 
Caisse de Depots et Consignations (CDC) in December 2008 with 
initial capital of 20 billion euros.  The GOF and the CDC each 
contributed 7 billion euros in equity shares and 3 billion euros in 
cash.  The FSI CEO and other leading officials are largely drawn 
from French industry.  In a second phase, the FSI is to be opened up 
to other investors, private and/or foreign, but the state will 
retain a blocking minority share of at least 34%.  The CDC chief of 
staff explained to us that the CDC is uniquely positioned to operate 
an investment fund on sound business investing principles to act in 
the general interest.  He expected that the FSI would operate fully 
independently and would be overseen by the National Assembly, as is 
the case with the Caisse itself.  He also pointed out that the FSI 
has absorbed a similar but smaller operation "France 
Investissements" that has been operating for two years with one 
billion euros invested in either innovative or rapidly growing small 
and medium enterprises and in SME investment funds. 
 
Where is the FSI Investing? 
---------------------------- 
¶6. (U) Prior to FSI's actual creation, the President promised 
aeronautics firm Daher an 85 million euro investment to support 
research and development.  On January 20, FSI signed a memorandum of 
understanding with auto producers, Renault and PSA Peugeot Citroen, 
to co-finance a 300 million euro fund (recently increased to 600 
million) to provide capital for smaller automotive suppliers and 
grow such companies to a European or global scale.  In advance of 
investments from that sub-fund in small suppliers, in mid-February 
FSI took an 18.7 million euro position in the voting stock of major 
automotive system producer Valeo, which brings FSI's total equity 
share in Valeo (counting equity "inherited" from CDC holdings, to 
8.33%.  Thomson, the troubled media equipment producer, is said to 
be applying for similar support, but FSI board members have 
reportedly suggested Thomson settle its problems with creditors and 
shed non-strategic subsidiaries first.  There have also been 
questions about an investment in Thomson due to the large proportion 
of its business activities in the United States. 
 
The Fiscal Stimulus Package 
--------------------------- 
¶7. (SBU) In early December, President Sarkozy launched a 26 billion 
euro recovery package which included 11 billion in public 
investment, 11 billion in tax-related cash-flow assistance to 
business, and 4 billion in investment by government-owned 
enterprises (rail, post, energy).  This initial program was 
supplemented by a multi-billion euro package of measures for the 
automobile sector that includes loans to major auto manufacturers 
(ref D).  The government's 11 billion euro public investment is to 
be used in some 1000 projects throughout the country, chosen for 
their positive impact on employment and public infrastructure, 
particularly when they can begin immediately.  Patrick Devedjian, a 
Sarkozy loyalist and until recently, head of the President's UMP 
party, was appointed Economic Recovery Minister under the Prime 
Minister and is overseeing this spending.  His staff told us that 
their objective is to commit 75% of the funds in 2009.  The first 
projects approved in February, receiving 1.4 billion euros, include 
military procurement (amphibious vessels, armored vehicles), 
refurbishment of military installations and university buildings, 
construction of 70,000 low-cost housing units, and road and port 
renovations. 
 
The Supplemental Social Package 
------------------------------- 
¶8. (U) Following a February 18 "summit" with representatives of 
employers and unions, President Sarkozy announced an additional 2.6 
billion euro "social" package targeting lower income families, the 
temporarily unemployed and youth.  The plan includes: 
 
--an income tax cut for some 4 million low-to-middle income 
households; 
 
 
PARIS 00000287  003 OF 003 
 
 
--an unemployment benefit hike guaranteeing 90% of net pay for those 
facing temporary layoffs (chomage technique) such as in the 
automobile sector; 
 
--a one-time payment of 500 euros for job seekers under 25 who don't 
qualify for unemployment benefits; 
 
--a 200 euro voucher to subsidize home care for the disabled; and, 
 
--an additional 150 euro-per-child school allowance for about 3 
million families. 
 
The government has also set up a "Social Investment Fund" to finance 
vocational training of workers with an initial endowment of 800 
million euros, possibly growing to 3 billion euros. 
 
¶8. (SBU) Comment:  While the credit guarantee system is functioning, 
the equity and public investment aspects of the recovery plan are in 
their early days and will take some time to ramp up.  One private 
sector contact estimated last month that of the 26 billion euros in 
the fiscal stimulus package, only 3 billion actually represented new 
money, as opposed to accelerated investment from 2010 or 2011 funds. 
On the other hand, we are relatively confident that the senior 
officials charged with making these programs work are more than 
capable of getting money out the door quickly, both to the public 
and private sectors. The more interesting question is whether the 
GOF will go beyond the limited initial funding of the FSI and open 
participation in its national champions to foreign capital. 
 
PEKALA