11.5bn euros – that is the number that caught my attention today when scanning the financial headlines. Another bank bailed out. Given the current economic climate one would suppose that news like this does not shock anybody anymore. But this case is special. The bank that was bailed out today was PSA Finance. Does that ring a bell? Certainly not as a big player in the financial world. PSA Finance is not one of the ‘systemically important financial institutions’ like Lehman Bros or RBS. It is merely the financial daughter of the (in?)famous French carmaker Peugeot. Peugeot has caught our attention during the last few months for only one reason: The continuous announcements to cut more and more jobs and the plans to close down production facilities (lastly in July when they announced to eliminate more than 8,000 positions). At least, this is how I perceived it when compiling the daily news reviews during my internship in Paris this summer.
So, what happened? Peugeot puts emphasis on the fact that the bank is still profitable. A look behind the scenes reveals that there is something utterly wrong with the system. PSA Finance’s main activities are the financing of car sales. Many big carmakers have their own banks that offer credits well below market rates for potential customers. Having worked for Volkswagen myself, I can tell you that their financing products are more than tempting. Zero percent financing and the offering interest rates well above market value makes it hard for employees to even consider other banks.
But it is no secret that Europe’s carmakers are struggling at the moment. The European market seems more and more saturated with sales dropping by 18% in France, 26% in Italy and 37% in Spain. As a consequence, carmakers have lowered prices (Volkswagen has just announced that their revenues for 2013 are expected to rise whereas profits will probably stagnate) and embarked on what is now an open discount battle. A way around this was to offer even more attractive financing schemes; at least this seemed to be a suitable solution for Peugeot. Et voila, the zero percent financing was born. If you can’t offer a good car, you have to offer a good credit. That banks following such a business model will sooner or later encounter problems of refinancing should hardly surprise anyone. Even whether they are still profitable remains questionable for me.
The mechanism that has been decided upon by the French government is rather complicated. French state officials deny that the proposed solution was a state bailout. The plan is that 30 private sector banks inject funds into PSA Finance while French state provides a guarantee. Peugeot itself declines to comment. Sounds pretty much like a bailout to me…
How does all that fit into my blog, some of you might ask. The future of finance will not be influenced much by yet another bailout. However, if you remember last week’s post, I was writing about the future of retail banking. One aspect that I didn’t mention was the increasing trend in the private sector to provide credits as part of their business models. I originally wanted to bring up the question whether businesses themselves might be tomorrow’s retail banks. A paragon for this upcoming model would be the Brazilian retailer Magazine Luiza that finances its 75% customers purchases from the network of its branches. But today’s headline had me rethink my former quintessentially positive assessment of this strategy.
With such innovative financing solutions being bailed out in case of failure we have reached a whole new level of competitive distortion. It comes as no surprise that Lower Saxony, Volkswagen’s second biggest shareholder, has already made clear that it strictly opposes the French government’s plans.
To some this might seem like another ‘too big to fail’ story. For me, it seems like something else: The backing of a business model that is unprofitable in its core. What about all the people that end up losing their jobs?’, some might ask. Admittedly, this train of thought is a very liberal one. But if the crisis will never produce any losers, where are the lessons learned? Nothing would change, an “And after…?” simply won’t happen. But in order to overcome the crisis, we have to learn from our mistakes. We have to let go of business models that turned out to be badly thought out. If we continue bailing out with a similar easiness, all we do is prolonging the crisis. And who knows, maybe for the first time in history we will encounter a triple-dip recession.
Boxell et al. (2012). France nears deal to rescue Peugeot. Financial Times. Available at: http://www.ft.com/cms/s/0/1f689b30-1d01-11e2-abeb-00144feabdc0.html#axzz2AFfGtyB4
Handelsblatt. (2012). Peugeot setzt auf Staatshilfe und Allianz. Oct 24th 2012.
Stock, O. (2012). Autoindustrie – nach dem Doping folgt der Kater. Handelsblatt. Oct 24th 2012.
The Economist. (2012). Branches: Withering away. Print Edition 19th May 2012.
The Economist. (2012). Forward and reverse. Oct 24th 2012. Available at: http://www.economist.com/blogs/schumpeter/2012/10/europes-carmaking-crisis