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The new government-guaranteed loan in France

4/24/2020

French banks may grant up to EUR 300 billion of government-guaranted loans (‘Prêts garantis par l’Etat’, or PGE) until December 31, 2020. This instrument, which is of an unprecedented scale, is dedicated to helping companies overcome cash-flow difficulties resulting from the coronavirus crisis.

TRANSCRIPT // The new government-guaranteed loan in France : April 2020

FOCUS

 

François Doux: In France, to cushion the impact of the recession on businesses, the government has introduced State-guaranteed loans.

FNAC-Darty was the first company to take out one of these loans, to the tune of 500 million euros. Speaking to us about this, we have Laurent Quignon, head of banking economics at BNP Paribas Economic Research.

Hello Laurent.

 

Laurent Quignon: Hello François.

 

François Doux: Can you tell us how these State-guaranteed loans work in principle?

 

Laurent Quignon: The State-guaranteed loans are bank loans intended to secure companies’ cash flow. Payments are deferred for one year, and companies can extend the deferral period by 1 to 5 years, taking their maximum potential term to 6 years.

The State will guarantee up to 300 billion euros of loans in total. Banks have been distributing these loans since 25 March 2020, and will continue to do so until 31 December 2020. With a few exceptions, they are available to all non-financial businesses, whatever their size or legal form, including shopkeepers, sole traders and independent professionals, all the way up to listed companies. The exceptions relate to companies in insolvency proceedings that have not yet entered a safeguard procedure or receivership, and companies undergoing court-ordered liquidation.

 

François Doux: What is the maximum amount of the loan that a business can obtain?

Laurent Quignon: The maximum is a quarter of their annual revenue, or two years of payroll costs for recently founded or innovative companies.

 

François Doux: Since these are bank loans, how much remuneration are the banks getting?

 

Laurent Quignon: The borrower pays a commission to BPI France Financement, which collects it on behalf of the State. The commission varies according to the total term of the loan, and is lower for SMEs.

The banks waive all remuneration during the deferral period, and so the cost of the loan is basically the cost of the guarantee.

 

François Doux: Is there a risk for banks granting these State-guaranteed loans?

 

Laurent Quignon: The risk is shared with the State. The State assumes 70% of the risk for large corporations and 90% for SMEs.

 

François Doux: So the banks still have some residual risk?

 

Laurent Quignon: Exactly. The banks do retain some residual risk. If a credit event occurs within two months of the loan being disbursed, the State guarantee will not apply and banks are not authorised to take additional guarantees or collateral for State-guaranteed loans.

 

François Doux: What is the impact on banks’ solvency ratios, which you monitor closely in the banking economics team?

 

Laurent Quignon: For banks, the State guarantee limits the amount of capital they use as regards the solvency ratio, but not as regards the leverage ratio. This means that banks will have to set aside capital equal to between 3% and 3.75% of the amount lent, regardless of the proportion guaranteed by the State.

 

François Doux: Have many loan requests been accepted so far?

 

Laurent Quignon: According to the French Banking Federation, around 95% of all requests have been accepted. Companies that have been refused a State-guaranteed loan can refer the matter to the credit mediator. There are also other arrangements companies can use instead of or as well as State-guaranteed loans. There’s a 7-billion-euro solidarity fund for very small companies, sole traders and independent professionals. There’s an economic and social development fund, which has been increased from 75 million to 1 billion euros, for larger companies that are struggling. Finally, a 20-billion-euro fund is about to be set up to allow the State to take larger financial stakes in strategic companies.

 

François Doux: So there are a lot of financing possibilities as well as these State-guaranteed loans. The total amount, as you just said, is 300 billion euros. Can you put that figure into context, Laurent?

 

Laurent Quignon: It’s a large sum, equal to almost one year of loans granted to non-financial companies. Between March 2019 and February 2020, banks granted 330 billion euros of new loans to non-financial companies.

 

François Doux: How much support has been given to date?

 

Laurent Quignon: As of 15 April 2020, banks had granted 22 billion euros of State-guaranteed loans, and were processing another 40 billion of loans. This shows that banks have got behind the plan enthusiastically and have acted extremely quickly, because 22 billion is 15% more than the normal three-week amount of new loan production, and these new State-guaranteed loans are on top of banks’ other new lending.

 

François Doux: My last question, Laurent Quignon, is the one that everyone is asking. Will these State-guaranteed loans be effective?

 

Laurent Quignon: It’s a solution that’s very well suited to businesses that will see their business levels bounce back fairly strongly in the second half of 2020, if the public health situation allows. For example, companies that sell durable goods, cars, household equipment and so on.

 

François Doux: But that’s not the case for all companies.

 

Laurent Quignon: Yes, you’re right François. For hotels and restaurants, for example, additional support will be needed. The decision that’s just been taken to cancel 750 million euros of tax and social-security charges in this sector is a step in the right direction.

 

François Doux: Thank you, Laurent Quignon, for this update on State-guaranteed loans, which should make the recession a little more comfortable for businesses in France. In a moment, we will talk about countries’ debt-to-GDP ratios in Chart of the Month with William De Vijlder.

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