Whether loans or grants, the bill will be hefty and still may not prevent economic catastrophe
When the fireworks went off (social distance permitting) in many countries to celebrate the New Year, the sentiment in many countries was that 2021 would be different. The feelings made sense. Vaccines had been approved with distribution around the corner. Equity markets were rising, and businesses were planning office re-openings. And politicians were talking the next phase and post-covid life.
The New Year’s optimism has sadly tampered like the usual gym attendance resolutions. The new waves of different covid-19 variants from South Africa to the U.K. and complications with vaccine distribution are largely to blame for the growing despair in many countries. And economic fallout looks more deferred than avoided.
France and State Guaranteed Loans
France is debating the conversion of some state-guaranteed loans to grants to help the hardest hit companies in the country. French Finance Minister Bruno Le Maire thinks the alteration of the debt for some companies is a necessary step to avoid the impending debt cliff that could undercut French growth and recovery.
The state has issued about 130 billion euros ($157 billion) of state-guaranteed loans under prêt garanti par l’état (PGE), mainly to help small companies through the pandemic. There are numerous French giants in that group too. For example, France will provide a 500 million euro state-guaranteed loan to French hotel property group, AccorInvest, to ward off the impact of the pandemic on the hotel industry with remote meetings and little-to-none tourism.
The French loan program has help to stave off insolvencies with the rate 40% below 2019 levels, according to UBS. Now, as the pandemic continues, there is rightfully a growing belief that the pandemic’s current runway is longer than the runway of the loan program with job losses growing thus French leadership’s push to consider more aggressive measures to avoid a major economic catastrophe. The grant route, however, may be more symbolic than actual solution. Either companies will assume the bill by repaying the debt or the government will assume the bill by taxing citizens more to cover the money it borrowed to fund the PGE.
When the pandemic started, the PGE was eye-catching with the 300 billion euros pledged by the French government to fill the expected liquidity crisis. France wanted to avoid the 2008/2009 crisis where markets crashed and there was little cash in the ecosystem. Yet, liquidity never exactly became the problem as financial markets remained open. It is more a question of solvency today as the French economy is expected to have contracted 9% in 2020 and 2021 projections are incomplete but economic growth is estimated at a very fragile 6%. Localized lockdowns and slow commerce suggest that 6% may be optimistic for France and that the number of insolvency cases will rise in the near term.
The French banking sector is a manifestation of the problem. While cash has been targeted to companies (and corporate debt has steadily grown each quarter during the pandemic), there is no certainty that companies will survive. Banks consequently must prepare to absorb the unavoidable insolvencies that will come during the pandemic (or also post-pandemic when it is obvious which bailed-out companies are not viable in a post-covid world). A weakened banking sector would only amplify economic angst because if the government aid becomes limited and banks cut lending, more small and medium sized companies will fail, which makes money spent in 2020 (via the PGE) to prop those companies up look wasted.
The Macron Election Factor
Macron will run for reelection in 2022 and will face a French public frustrated by unemployment and a lack of economic opportunity if things do not change this year. The 9% decline in 2020 GDP implies that Macron will walk into the April 2022 presidential election—absence a big economic growth spurt in 2021 (i.e., beyond the estimated 6%) and the first quarter of 2022—with an economy that is below pre-crisis level. Public debt will hover around 120% of GDP. All this will be after the state’s PGE program will have spent about 200-250 billion euro to support the French economy.
Macron must also look across the Atlantic at the U.S. and appreciate that business leaders may be comparing the French economy to the American economy when they are at the polls. Before the pandemic, France was the #1 tourist destination with 89.4 million visitors in 2018 but there is little tourism today (and likely a subpar amount by the end of 2021). Domestic and intra-European ground travel will likely still be down too by election time which hurts the national railway company, SNCF, and its investment in Eurostar, an operator in trains between France, the U.K., Belgium, and the Netherlands. France is also home to one of the world’s two major aircraft manufacturers, Airbus, which has had major layoffs. However, the layoffs, to the benefit of Airbus, have been overshadowed by Boeing’s manufacturing mistakes. That said, if the French economy cannot create some sense of normalcy in 2021 and the U.S. (or U.K., however less likely) have a strong economic rebound, French pride and frustration could become a toxic mix for a politician campaigning during what many French citizens may start to view as the never-ending pandemic.
Given the backdrop and likely competitive race, Macron will be under pressure to succumb to political expediency. Such expediency, however, can only backfire with business leaders wanting more economic assistance and the ‘yellow vests’ wanting more economic justice. To be fair, Macron did not receive the same covid-19 boost in the polls afforded leaders in Germany, the U.K., and Italy at the start of the pandemic. Having said that, Giuseppe Conte recently resigned as prime minister in Italy and Prime Minister Boris Johnson has a growing contingent of critics at home and abroad, emphasizing how hard it is to govern and maintain high approval numbers in the current state of the world.
Who Will Pay the Bill?
France’s discussion on the transformation of state loans to grants signifies a greater problem for European economies. Many governments underwrote their economies with increased liquidity either through loans or deferment of debt. But the wall of insolvency (or, at least, stalled growth) cannot be avoided. Le Maire’s (and Macron’s) ability to steer the ship beyond the liquidity rainfall period will be closely watched by other leaders. It is easy to appreciate the French initiative on addressing the growing economic problem. Still, it is not clear how grants do not simply massage the problem without facing the reality that no one ever agreed on who was paying the economic bill for the economic problems avoided. Sorry if that last line is so confusing…it is confusing when you choose to run-up a bill with no plan for paying it.
