“We don’t have any doubt about the solidity of French banks,” said Valérie Pécresse, spokeswoman of the French government—a week after the collapse of Dexia, the Franco-Belgian Bank that had already been bailed out in 2008. Even as she spoke, plans to carve up Dexia and bail out its bondholders and counterparties were being refined.
Among its many reckless acts, Dexia sold complex structured loans to French towns and communities who didn’t know what they were getting into. These structured loans were based on the Swiss franc. When the franc skyrocketed, interest on these loans skyrocketed as well. Communities could no longer pay. And voilà, toxic subprime à la française.
The French government has been trying for months to sweep this under the rug, and might have been able to, had Dexia not blown up. Now a price tag has been announced. The Caisse des Dépôts, France’s state-owned investment bank, will take on Dexia’s portfolio of these toxic loans. The French government will provide loss guarantees. The amount? €25 billion ($34 billion). Peanuts compared to Dexia’s other toxic assets, including sovereign debt and derivatives of all kinds that have yet to be dealt with.
France’s mega-banks are teetering as well. Société Générale lost half its value since July. Moody’s lowered its credit rating to Aa3, with a negative outlook. Reason: exposure to southern European sovereign debt. Major companies yanked out their money. Then there were stories of a secret meeting at the Ministry of Finance concerning the partial government takeover and bailout of French banks. Apparently, SocGen accepted such a deal, while BNP Paribas rejected it. BNP is the world’s largest banking group with $2.8 trillion in assets—larger than the entire economy of France ($2.1 trillion GDP). And they’re all desperately trying to sell assets to stay afloat.
On Wednesday, President of the European Commission, José Manuel Barroso, weighed in with a speech to the European Parliament. A comprehensive recapitalization of Eurozone banks would be needed to deal with the debt crisis, he said. And if private funds didn’t materialize, well then, he said, it would have to be the taxpayers via the European bailout fund, the EFSF.
Back to Valérie Pécresse. After proclaiming that the government didn’t have any doubt about the solidity of French banks, she added, “The turbulences in the financial markets make it necessary for European banks to raise capital.” To do this, “France wants a collective European solution.”
Hence, the root cause of the problem is “turbulence in the financial markets,” not reckless bankers and politicians who have conspired for years to create this scenario.
With “collective European solution,” she means of course that Europeans are all in this together, regardless of who got them into it. So European taxpayers will need to help bail out French banks, particularly BNP, which is so large that France couldn’t bail it out on its own without ruining its AAA credit rating.
France wouldn’t seek the help of the EFSF, she said, but yes indeed: “If public money is necessary, well, the French government is ready to deal with a request by the banks for public money.” Hence, the EFSF and increasingly the printing press of the ECB.
Maybe, as before, this theater of the absurd can calm the markets for a few months or a year. Calming the markets, after all, is what this is all about. But the victims are already known: citizens. They’ll pay for this with a combination of higher taxes, inflation in goods and services, and lower real wages.