France’s Private Banks Go Public

Mitterrand’s Socialist government moves to nationalize them

“The government has no idea of where it is headed. The entire program is being undertaken regardless of the economic consequences.” So said Yves Laulan, chief economist for France’s big Société Générale bank, last week, and few of his colleagues were prepared to disagree with him. Four months after the Socialist Party’s overwhelming election victories in the spring, President François Mitterrand is determinedly pressing ahead with plans to nationalize France’s 36 largest privately owned banks and investment houses. Mitterrand’s coalition Cabinet, which includes four Communists, is expected to announce final details of the state takeover this week. The action will make France the only non-Communist country in the world to have credit almost totally under government control. Less than 7% of the nation’s bank deposits will now be in privately owned institutions.

France’s four major banking houses* together control upwards of 60% of all deposits in the country, and have been government owned since Charles de Gaulle nationalized them in 1945. But the three dozen privately owned banks that are being taken over, many of them in smaller cities outside the Paris region, have flourished in recent years.

In his presidential campaign, Mitterrand promised to put them under state control. More recently his aides have been saying that state control of finance is vital to ensure that their Socialist economic program is fully implemented. Said Jean Le Garrec, Mitterrand’s Minister for Nationalizations, last week: “The bank nationalizations will guarantee the enforcing of the will of the state, not through some economic magic, but through assured mastery of banking and industry. This way we can be certain that the state’s wish to restimulate the economy is carried out.”

In fact, the takeovers will probably push France into deeper trouble. The country’s economy is already suffering from anemic growth, 7.7% unemployment and sagging investment. Nationalizing the banks—and 32 large industrial enterprises, including the Dassault airplane manufacturing company and the Saint-Gobain-Pont-à-Mousson fiber-glass maker—will almost certainly deepen the existing slump by making businessmen more wary of investing their money. Says J. Paul Horne, European economic analyst for the Smith Barney, Harris Upham & Co. investment firm: “The French private banking sector is all but gone. New private investment in France has been virtually frozen since the election.”

Ever since Mitterrand’s victory, private capital has been flowing across the border into Swiss banks. That in turn threatens further bursts of inflation in an economy that is already racked by price rises of more than 13%. Not only will the government wind up having to print more money, but increasingly it will have to assume the task of deciding where and how to invest those funds. Warns Economist Laulan caustically: “We have already had experiences of government investment decisions like the Concorde that turn out to be stupid. Look for more of these.”

Other Frenchmen argue that by controlling credit itself, the state will take over perhaps the most important function in a free economy. Says Jean Falala, a Gaullist member of Parliament from the Marne region: “The nationalization of credit puts the economy in the hands of the state. We are seeing part of our liberty disappear.”

Ironically, shareholders of the banks will probably not suffer much financially from nationalization. Though precise details of compensation will not be announced until this week, the conservative morning newspaper Le Figaro last week published the general outline for paying off bank investors. Using a formula based on average bank share prices from 1978 through 1980, the state will give shareholders long-term government bonds that pay a competitive interest rate in exchange for their expropriated stock. Beginning in 1983, the state will start redeeming the bonds by lottery, thereby giving shareholders the actual cash values of their nationalized holdings.

Though bankers have found little to gripe about in the takeover terms, the government’s brusque and indifferent way of launching the program in the first place has angered many of them. Officials at one medium-sized firm complain that government examiners cavalierly breezed through their company’s financial records, then rudely declined even to meet with the bank’s president to tell him that his bank was being taken over. Growled one financier: “Bankers talking to members of this government is like someone from Afghanistan talking to someone from Korea. Government officials simply don’t understand. They don’t speak economics.”

Instead of trying to mount a coordinated attempt to block the takeover drive, France’s bankers spent much of the summer pleading that their own banks should not be nationalized. One bank argued that its international operations were so large that the company was not really “French” at all. The argument carried little weight with Finance Minister Jacques Delors, and the bank is being taken over. Another one tried, equally futilely, to get top officials of the U.S. Treasury to threaten France with retaliation if the takeover went through. The Treasury refused.

With the nationalization program under way, a flight of capitalists may be joining the flight of capital that is already taking place. Big multinational executive search firms like Eastman & Beaudine of Chicago and Houdiniére & Morgan International of Paris have been polling top French bankers to see if they might be interested in joining international banks elsewhere in Europe or in the U .S. —By Christopher Byron. Reported by William Blaylock/Paris

*Sociéte Générale. Crédit Lyonnais. the Banque Nationale pour le Commerce et 1’Industrie and Le Comptoir National d’Escompte de Paris, which merged in 1966 with the Banque Nationale de Paris.