February 10, 2009 - French Government Aid Program

France Gives Help to Renault, Peugeot

In Return for $8.4 Billion in Low-Interest Loans, Auto Makers Agree Not to Close Factories or Lay Off Employees

France Gives Help to Renault, Peugeot

The French government said it would give €6.5 billion ($8.4 billion) in low-interest loans to Renault SA and PSA Peugeot-Citroën in exchange for pledges that the car makers won't close any factories or lay off workers in France for the duration of the funding.

The deal, which caps weeks of negotiations, is the latest evidence that governments around the world are resorting to measures that protect domestic jobs and businesses as they prop up various sectors of their economies. Just last week, President Nicolas Sarkozy said it was unacceptable for French car makers to manufacture in low-cost countries, such as the Czech Republic, and import back into France, angering the Czech premier who said such protectionism would hurt Europe's long-term recovery.

The government will give Renault and Peugeot each a five-year loan of €3 billion at a 6% interest rate, while and offer an additional €500 million in loans to other automobile companies with operations in France. The interest rate is far lower than the 10%-12% the companies would have gotten on normal credit markets, according to the companies.

In addition to the loans extended to Renault and Peugeot-Citroën, the French government agreed to two separate, additional measures to help the local auto sector, which employs 10% of the French work force. The government said it would double, to €2 billion, a separate set of loans that it already has extended to the financing arms of Renault and Peugeot-Citroën. This move is aimed at making it easier for consumers to get car loans. The government also doubled -- to €600 million -- a fund established to help auto-parts suppliers.

That Renault and Peugeot-Citroën were willing to agree to the government's terms underscores the dire state of the world auto industry. With auto sales plummeting globally, it is getting much harder for car companies to access credit via conventional financial markets. Car manufacturing is a capital-intensive industry, and companies rely on large lines of credit to keep the factories running, buy auto parts and pay staff. Both French car companies have been put on credit watch by rating agencies, meaning that it will get harder for them to borrow at favorable rates.

The concessions agreed to by the auto makers also represent a major change in position by Peugeot-Citroën. The company's chief executive, Christian Streiff, had been reluctant to agree to the government's terms, saying they threatened his company's independence. In contrast, Renault CEO Carlos Ghosn agreed early on to the terms, in large part because the French state owns 15% of Renault. Peugeot-Citroën is publicly traded and controlled by its founders, the Peugeot family.

"The negotiations were difficult," acknowledged Mr. Streiff. "But this [aid package] is of great help to us during the crisis. It will really strengthen our hand in our negotiations with banks." Peugeot-Citroën needs about €2 billion in working capital annually to fund its operations, according to a company spokesman.

The government aid plan comes just days before Peugeot-Citroën and Renault report full-year financial results for 2008. Analysts say the companies wanted to get the government help to stave off further credit-rating cuts when they disclose their debt positions, news that will come Wednesday for Peugeot-Citroën and Thursday for Renault.

Renault has more debt than Peugeot-Citroën. Analysts expect that Renault could end up with as much as €7.5 billion in net debt as of the end of 2008, compared with €2.5 billion after the first six months of 2008. Peugeot-Citroën's debt could be about €1.3 billion at the end of 2008, down from a positive cash position of €1.4 billion in the middle of the 2008.

The new loans follow other measures by the French government to help the auto sector. In December, the government started a plan to give €1,000 to people who scrap cars that are more than 10 years old and replace them with new models. Germany and Italy also have passed such incentives as part of their stimulus plans.

Original Story - Wall Street Journal

Update February 11, 2009

French Auto Aid Prompts EU Competition Inquiry

France's auto-sector bailout is coming under fire from other European car-manufacturing countries and has prompted an inquiry about whether the measures violate the European Union's strict competition rules.

France unveiled a plan on Monday to give €6 billion ($7.8 billion) in low-interest loans to Renault SA and PSA Peugeot-Citroën in exchange for promises that they won't close factories in France or lay off workers for the duration of the loans. The government also will offer €500 million in loans to auto-sector firms with operations in France.

The bailout is part of President Nicolas Sarkozy's effort to protect jobs in France as the economic downturn deepens.

European Commissioner for Competition Neelie Kroes wrote to the French government Tuesday seeking clarification on the package, citing concerns about the companies' pledge to protect employment in France, her spokesman said. A review of the French auto bailout by the European Commission, the EU's governing body, could take months.

Governments around the world are trying to shield local jobs and companies, raising concerns about whether a wave of protectionism could hamper economic recovery.

Under EU rules, governments aren't allowed to favor domestic companies when granting tax breaks, soft loans at reduced rates of interest, or other incentives.

The EU's decision not to stand in the way of huge banking bailouts in France, Germany and the U.S. late last year may have set a problematic precedent, said Simon Tilford, an economist at the Centre for European Reform.

"The bailout of banks ... allows countries like France to argue that their local industries, such as cars, are also being hit and need help," he said.

France maintains that the aid package isn't protectionist and conforms with EU rules. In a news release Monday, the government said its car bailout is "comparable" with what other countries are doing and is in keeping with prior EU decisions allowing "temporary measures to help access to credit and loans to companies."

The German industrial federation BDI said it was "highly alarmed" by the French plan. Swedish Finance Minister Anders Borg said the plan is "problematic for Sweden," home to Ford Motor Co.'s Volvo unit and General Motors Corp.'s Saab brand, because it "could lead us on the road to protectionism."

Slovak Finance Minister Jan Pociatek said his country is "totally against" the plan, while the Czech finance minister said countries shouldn't permit "any kind of protectionism in any sector."

The French plan comes as Western European car companies are increasingly producing small mass-market autos in Eastern Europe, where labor costs and taxes are much lower. Peugeot-Citroën has factories in the Czech Republic and Slovakia, while Renault produces cars in Romania.

Some of those cars are sold locally, while others are exported to France and other European markets.

Mr. Sarkozy said in a television interview last week that he wanted car makers "to stop relocation abroad" and return jobs to France "if possible."

When the French car companies recently came begging for help, Mr. Sarkozy exacted his price: protection of local jobs.

The measures are likely to be popular among French voters who are increasingly worried about unemployment and stagnating wages.

The 27-member EU has called for an extraordinary summit in the coming weeks to discuss how to coordinate economic-recovery measures and prevent a tide of protectionism.

Update Story - Wall Street Journal