The Legacy Of Lyonnais: Debts And Doubts

The bank bailout plan flounders at a bad time for Alain Juppe

It's an August ritual. Frenchmen returning from summer vacations find that while they were away the government has quietly upped the price of baguettes or Metro rides by a few centimes. This summer, it is happening again--but on a larger-than-usual scale. In mid-August, the public entity that was set up to finance the sell-off of the assets of Credit Lyonnais let it be known that it would need $1.4 billion from the public purse this year to balance its books. It's one of the first clear signs of the massive cost to taxpayers of salvaging the state-owned bank.

The outlay is just the first installment on what's likely to be a price tag of at least $9 billion for the 20-year plan launched last year to rescue Lyonnais from the downfall of its Napoleonic ambitions for expansion. The bill arrives at an embarrassing time for Prime Minister Alain Juppe. His government has been having trouble convincing French citoyens and wary markets that it is on track to cut spending, lower taxes, and shrink its budget deficit to meet the stringent requirements for a single European currency in 1999. Skepticism about those promises has already depressed the franc, which has fallen to a four-month low against the German mark. Now, as the bills for salvaging Lyonnais mount, public doubts that Juppe can make good on his pledges may deepen.

Government officials had been desperately hoping the rescue plan would buy time before its cost started hitting home. But the scheme, which transferred $29 billion in troubled Lyonnais assets to a special company for eventual sale, isn't working out that way. Expectations that a rebounding economy would lift the prices of bad real estate and other assets haven't panned out. And as asset sales have trickled in, so have the losses, including a $1.2 billion hit from the sale of MGM studios in July to financier Kirk Kerkorian.

Paris officials have been scrambling for ways to deflect the expected public backlash from the latest bad news about Lyonnais. A week before the Aug. 13 revelation of this year's bailout cost by Paris business daily La Tribune Desfosses, officials suddenly began clamoring for criminal prosecutions against former top directors of Credit Lyonnais, nearly three years after the bank's former chairman, Jean-Yves Haberer, was forced out of office.

Even that red herring risked undermining government credibility. Speculation swirled that a target of the outcry might be Banque de France Governor Jean-Claude Trichet, whose tight-money policy has drawn criticism from French President Jacques Chirac. Trichet had been director of the French Treasury when Lyonnais's overexpansion woes first became known. But any erosion of confidence in Trichet, the guardian of the strong-franc policy that ties the currency closely to the German mark, would deal a severe blow to France's aspirations for monetary union.

SLIPPERY SLOPE. For Credit Lyonnais, there's more bad news to come. Its total assets, now $330 billion, have shrunk by 12% in two years. And when Chairman Jean Peyrelevade releases first-half figures next month, it will be clear that last year's return to a meager net profit of $2.6 million was not a turning point but only a pause on the way down a slippery slope. Lehman Brothers bank analyst Sheila Garrard figures Lyonnais will lose $200 million this year.

In part, Peyrelevade's turnaround plan to privatize the bank within five years has been plagued by bad luck. Last May, a fire gutted the Lyonnais headquarters. Lending margins in France's battered banking sector remain razor-thin, while high unemployment makes it hard to cut staff. And slower-than-expected asset sales have combined with sagging interest rates to strap Lyonnais with a $600 million funding shortfall this year. The lower rates have cut into the bank's revenue from a $29 billion loan that it made to the state to finance the bailout. Terms of the deal gave Lyonnais a set interest rate last year but cut its return to 85% of money market rates this year.

Bank watchers believe the savvy Peyrelevade already is talking behind the scenes with French officials to win better terms on the loan. That would help Lyonnais's future results and restore hope that the bank can be privatized eventually. But it also would underscore a new French ritual: the steady notching up of the tab that French taxpayers will ultimately pay to close the Credit Lyonnais saga.