Ailing bank back in the spotlight

Date: 12/09/1996

By Tim Jones

COMPETITION officials are planning to give a quick-fire response to the French government's rehashed plan to keep the ailing state-owned bank, Crédit Lyonnais, afloat.

Only a year after the National Assembly approved a restructuring package that shifted 20 billion ecu in assets off

Crédit Lyonnais' balance sheet, Finance Minister Jean Arthuis is set to approve changes to the plan.

But officials say the European Commission, which attached tight conditions to the original rescue programme, will take a “hard line” if these are relaxed.

When the bail-out was authorised last summer, the Commission allowed the French government to inject 6.9 billion ecu of state aid into the bank, but only if Crédit Lyonnais slimmed down by 35&percent; within three years.

Moreover, to make sure that the bank did not hang on to the 'crown jewels' in its domestic network, Competition Commissioner Karel Van Miert insisted that a large chunk of these asset sales had to come from its European banking holdings.

In return, the bank was permitted to offload 20 billion ecu in loans which had either been written off entirely or were unlikely to be repaid by the debtors according to the original schedule.

To manage these bad or doubtful assets, L'Etablissement Public de Financement et de Restructuration (EPFR) - known as the 'bad bank' - was formed.

It is the financing of this institution which is at the root of Crédit Lyonnais' current difficulties, and looks like pushing the bank into losses of up to 300 million ecu this year.

The Commission insisted last year that the bank itself should compensate the state for taking over these assets, using a loan of 18 billion ecu made at interest rates below those operating in the money markets.

Crédit Lyonnais, in turn, has to finance the cost of this loan in the open market, where interest rates are higher.

The bank's chairman, Jean Peyrelevade, has complained that this mechanism would represent a charge of 610 million ecu this year and 1.5 billion ecu over the next decade - a crippling burden for a bank that is trying to rectify the appalling mistakes of the past.

While the Commission acknowledges that the burdens imposed by the rescue plan are cumbersome, it will not accept changes to the financing of the EPFR without at least insisting on new conditions.

Neither will the major private-sector French banks be happy with any slippage. The original plan annoyed them so much that they lodged a complaint with the European Court of Justice.