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Ballooning French Corporate Debt Rattles Regulators

French corporate debt is at a record 134% of GDP.French corporate debt is at a record 134% of GDP.

French corporate debt has ballooned to record levels as other eurozone countries have seen their firms cut debt, unsettling the central bank and prompting a cap on bank lending to the most indebted corporate borrowers.

Yet, while the surging debt is stressing regulators, senior bankers, ratings agencies and some economists say it is not so much a case of reckless borrowing as of clever financial engineering in which companies take advantage of low interest rates to cope with high taxes, Reuters reported.

France’s financial stability council, which includes the finance minister and central bank governor, has taken the unprecedented step of limiting a bank’s exposure to highly indebted firms to 5% of its capital. It was essentially a shot across the lenders’ bows about over-exposure.

French corporate borrowing has grown at more than 6% this year, and closer to 8% for big companies with easy access to the bond market, Bank of France data shows. That compares with forecasted economic growth of 1.8%.

In fact, 60% of the recent increases in eurozone corporate borrowing came from French firms even though France represents only 20% of the bloc’s gross domestic product, also according to the French central bank.

That has left French corporate debt at a record 134% of GDP, data from the Bank for International Settlements show. Stripping out intra-group loans, the Bank of France pegs the figure at a more manageable but still record 72%.

“We consider that there is a risk that big companies in particular are going too far,” Bank of France Governor Francois Villeroy de Galhau said.

The central bank is particularly worried that, thanks to cheap credit, some firms are overpaying for acquisitions and could find themselves nursing painful losses should they have to book big writedowns on takeover values in the future.

The council says the lending cap, which will take effect in mid-2018, applies to about 10 firms which it is has not identified.

Villeroy said it concerned firms with net debt over 100% of equity, which could cover companies like Air France KLM, Suez, Airbus, EDF and Casino, according to Thomson Reuters data. Companies not based in France but with big operations there could also be affected, which could include highly indebted Dutch-registered telecoms group Altice.

While debt levels are manageable now, a return to historic norms for interest rates could cut profits by more than 20%, Natixis chief economist Patrick Artus calculates.

“The corporate credit situation in France is very highly dependent on what happens to interest rates,” Artus told Reuters. “There’s a real problem with corporate debt in France.”

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