Guaranteed loans: “huge” differences in expected losses between London and Paris

Posted on Oct 11, 2020 at 11:51 am

Big deal. France is the country that has released the most State Guaranteed Loans (PGEs) in Europe, but it foresees an infinitely lower cost to its taxpayers than its British neighbor. According to a document released last week by the National Audit Office (NAO), the body responsible for monitoring public spending, the UK expects losses three to five times greater than France, while it plans to deploy less than half of the 122 billion euros already granted to French companies.

Assuming that the loan program for very small businesses affected by the pandemic will be deployed to the tune of 43 billion pounds (47.4 billion euros), the NAO estimates the potential cost to the government between 15 and 26 billion pounds (16.5 and 28.7 billion euros) due to the inability of many companies to refund the money and fraud. It is based on a projection from the Ministry of the Economy, which expects a loss rate of between 35% and 60% for this rebound loan mechanism, or “Bounce Back Loan Scheme” (BBLS).

A comparison “difficult” for Bercy

These projections contrast sharply with those of the French Ministry of Finance, which forecasts a loss ratio of between 4 and 5% for all PGEs. Based on current figures, this corresponds to a loss of 5-6 billion euros over the entire program, which can last up to six years. For the year 2021 alone, the finance bill has provided for an envelope of 1.3 billion euros, corresponding to a default rate close to 1%. Has the French government sinned out of optimism?

It is believed that the two devices are not similar at all, we defend ourselves at the Ministry of Finance. The comparison is difficult “. Bercy highlights two main differences. Firstly, the British program is aimed exclusively at VSEs / SMEs for a maximum amount of 50,000 pounds, while French covers the entire spectrum of businesses, even if 95% of cases come from SMEs. Each case weighs on average 205,000 euros in France. Second, the “BBLS” is 100% guaranteed by the state while the EMP is 90% guaranteed, with the banks paying the rest.

It makes a very big difference, we insist at Bercy. We could say that the selection is much stricter in France because there is an alignment between the banks and the State “. ” Banks approve loans within 24-72 hours for existing customers “, Underlines the NAO. This quasi-automaticity convinced 1.2 million SMEs to use the device, more than double the number of French cases, exceeding the expectations of the government of Boris Johnson.

Germany chooses the middle path

It is the differences in the criteria for granting loans that explain most of the gap “, Judge Nicolas Hardy, analyst at the rating agency Scope, in a note published Friday and entitled “United Kingdom versus France, the staggering difference between the expected losses of the loan schemes on the Covid”. ” I am a little skeptical about the French rate of 4 to 5% but 30% seems too much to me, however, underlines another banking analyst. I would feel more comfortable with a rate of around 15% “.

In the entourage of the British Treasury, we relativize. ” Default forecasts are very preliminary and remain highly speculative at this stage “, It is indicated, pointing out that the calculations of the Office for Budget Responsibility (OBR), the independent body responsible for monitoring public finances, lead to even wider default estimates, from 15% to 60% .

Between the two countries, Germany seems to have chosen the middle path. According to our estimates, based on the federal government’s 2021 finance bill, Berlin plans to set aside 1.85 billion euros for guarantees on emergency loans deployed by the state-owned KfW bank. Compared to the amounts requested so far, i.e. 56.7 billion euros, this corresponds to a default rate of around 3% over the next year alone and three times the annual rate used by Bercy in its 2021 budget.

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