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Credit crunch

September 14, 2009

The French government has told the country's banks to keep lending to businesses and households following claims that they have become too tight with their money. Banks say they are simply trying to avoid risky loans.

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Stack of euro bills
Small French companies are having a hard time getting banks to part with their cashImage: dpa/PA

French banks have recently been accused of shunning small and medium-sized businesses in particular since the crisis struck - despite receiving billions of euros in state aid designed to keep credit flowing.

Clair Service Hotellerie is one of the companies affected by the banks tightened lending. From small headquarters in Paris, it provides staff for the hotel industry worldwide. Its recruits, often from eastern Europe, are employed directly and trained by the company.

The agency's survival has been threatened by cash flow problems since its bank revoked the company's overdraft facility a year ago, burdening the agency with tens of thousands of euros in extra charges.

A hotel room
Staffing hotels could become impossible for one French companyImage: AP

"Overnight we could not pay salaries or social charges on time," the agency's marketing manager, Renaud Chemin, said. He added that the bank had told it to increase its capital, a suggestion the company says is impossible under current circumstances.

Clair Service Hotellerie now faces bankruptcy within three months.

"Since the bank will not make our situation easier, it just means the end of the company," Chemin said.

Such an outcome would be bound to have an impact on employees like Katarina Piekarmiak. She trained to be a French teacher in her native Poland, but found jobs hard to come by. She replied to an advertisement from France and, since January, she has been on the agency's books, hired out to a hotel in Paris where she works as a receptionist.

"In Poland I was unemployed, so this work allows me to earn money and live normally," she said. "Without this agency I'd be unemployed again, and if I found nothing else here I'd go back home and probably be out of work again."

Banks accused of starving businesses

Many other small firms face problems similar to those of Clair Service Hotellerie - especially in the restaurant industry where the banks stand accused of eschewing the whole sector.

Abdellah Mezziouane
Banks are becoming extremely cautious, Mezziouane saidImage: DW

"I increasingly notice banks that are more and more hesitant and more and more cautious when it comes to taking risks," said Abdellah Mezziouane, general secretary of the CGPME in Paris, which represents small and medium-sized businesses. "We have concrete cases where small and medium-sized businesses can no longer find the means to finance their development and their investment, and no longer have access to funds."

A mediator appointed by the government to investigate complaints is dealing with a surge in the number of claims from small and medium-sized businesses. Last year, the banks, which had received billions of euros in state aid, agreed to increase loans by 3 percent to 4 percent. But they have not reached that target.

Who is to blame?

The banks have defended themselves against charges that they are becoming too tight-fisted. Some analysts have agreed with the banks, saying reduced demand caused by the recession is to blame for failure to meet lending targets.

"For one or two quarters neither households nor companies were willing to borrow any more," said Cyril Blesson, chief economist with Seeds Finance consultants.

Banks have perceived small businesses in particular to be too high a risk during the crisis, and tightened their lending conditions late last year, Blesson added. However, with interest rates consistently low, he said he sees grounds for optimism.

A hand taking euros out of an ATM
Demand for credit is slowing picking up, some analysts saidImage: dpa

"According to the lending surveys from the central banks and especially the Banque de France, we have signs of a revival in demand for credit," Blesson said. "That is good, but now we also need banks to lend to households and companies that are willing to get indebted again."

Adopt "small-business attitude"

In the meantime, as many smaller companies continue to suffer, both the French government and business leaders have appealed to the banks to be more flexible.

Finance Minister Christine Lagarde has written to 12 banks that have received state support, giving them until the end of the month to outline the measures they are taking to revitalize their credit policies.

"I ask the French banking sector to adopt the attitude of small and medium sized companies," Laurence Parisot, head of the Medef employers' organization, said in a recent radio interview. "It is the most difficult time for them because for months they've had order books falling by 30, 40, 50 percent. A large company can get by; a small business can't."

Author: Alasdair Sandford (sms)

Editor: Kate Bowen