France Ready to Assume Part of Credit Insurance Risk for Companies

France will be the first among major economies to offer state guarantees that should protect suppliers from customer payment defaults, amid heightened fears of bankruptcy, writes the London financial daily The Financial Times on Wednesday.

Finance Minister Christine Lagarde is expected to announce during the day that Caisse Centrale de Reassurance (CCR), the state insurer, will guarantee that suppliers will be insured against cases of customer payment defaults. This is the latest in a series of initiatives by the French government aimed at providing assistance to companies as the economy approaches the brink of recession.

On Tuesday, French President Nicolas Sarkozy stated that he would announce a "comprehensive stimulus plan" focused on the automotive and construction industries by the end of next week. Its value is expected to reach 19 billion euros.

Increased caution among credit insurers has become a serious problem in some countries, particularly in the United Kingdom, and the French plan could increase pressure on governments to follow Paris’s example. Two of the three largest credit insurers in the world, Coface and Euler Hermes, are headquartered in France, although the latter is owned by Germany’s Allianz. The government has not yet decided how CCR will intervene in the market, said one source. However, the most likely option involves "complementary" coverage in cases where the credit insurer withdraws protection. The private sector will be responsible for directing clients who need additional protection to the government scheme. The government has yet to announce how much money it will allocate for the scheme and what interest rates CCR will charge for insuring risky loans.

"Sharing risk with the state would provide additional assurance, which I estimate could increase the volume of corporate lending by five to ten billion euros," emphasized Michel Mollard from Euler Hermes SFAC. Company leaders have stated in unofficial contacts that they are confused by the government’s intervention in the market given the stable volume of credit. They note that there has been no sharp reduction in payment default insurance.

In contrast, credit insurers are reassessing their position in the UK market as they face increasing losses due to customers not paying suppliers. Thus, the largest credit insurer in the UK, Atradius, withdrew insurance for 12,000 clients in just one week. However, the UK government did not intervene, instead deciding to ensure small and medium-sized companies access to credit. (Hina)