France voiced confidence on Friday that the European Commission would back planned state aid to the banking sector, even as the EU executive vowed not to back down on its main criteria for approving such help.
“I have strong hopes that the recapitalization plan submitted by the French authorities will be approved by the European authorities extremely rapidly,” French Economy Minister Christine Lagarde said at an event in Paris.
EU Monetary Affairs Commissioner Joaquin Almunia said at the same event he expected the Commission to decide soon on whether to approve France’s €10.5 billion ($13.3 billion) bank aid plan ahead of a Dec. 11-12 EU summit in Brussels. Almunia gave no clue to what the decision would be, and EU Competition Commissioner Neelie Kroes, who will have the final say, insisted on Friday that schemes in France, Germany, Austria and elsewhere must stick to the rules.
A key bone of contention is the price banks will ultimately have to pay for the state help, with the Commission currently pushing for higher rates than those proposed by governments. Kroes said in a speech on Friday that for healthy banks the Commission accepted a pricing formula developed by the European Central Bank (ECB) which officials estimate sets a repayment rate of around 6-9%. But she also repeated her view that this had to be adjusted upwards depending on the risk profile of each beneficiary bank. “That will not change. Kroes will not budge on that,” one EU source familiar with revised guidelines to be issued by Kroes as early as next Monday told Reuters. The Commission was unlikely to recommend a single rate, but Kroes has privately favored a figure around the 10% mark, the source said.
COST OF CAPITAL
France wants the repayment rate to match the ECB formula, while Germany is seeking rates of 5.5% and 8.5% for cash totaling €8 billion in support for Commerzbank. Austria is asking for a rate of 8% from Erste Bank. “The cost of capital is one of the main factors on which banks compete, so we must ensure that such state recapitalizations do not become a permanent feature of European financial markets,” Kroes told the event in Luxembourg.
However, French officials have been confident that the Commission’s decision will be favorable, and a source close to Lagarde said on Friday: “All the signals we’ve got so far have been very positive.” France believes a compromise can be found under which the Commission accepts a repayment rate around 6-9%, and it also wants to ensure that banks that are basically healthy are not forced to scrap dividend payments.
EU finance ministers who met this week said the Commission should distinguish between sound banks hit by frozen credit markets and distressed banks like Dexia or Britain’s Northern Rock, which needed full-scale state bailouts to survive. Like other countries, France wants to ensure that the no dividend rule is not applied to sound banks.
Without referring to the French case, a second EU source said the new guidelines would introduce some extra flexibility, but with conditions attached. “This will be strict, and the banks must make sure they make whatever credit they get from governments available. The rules will be more flexible, but don’t expect anything too spectacular,” the source said. (Reuters)