France’s Public Bank Sees Rise in Default Risk for Covid Loans

The risk of firms defaulting on France’s state guaranteed loans is rising as the Covid-19 crisis drags on with renewed restrictions on activity, the public investment bank Bpifrance said.

The lender now expects between 5.5% and 7.5% of all France’s Covid loans to default, instead of 4.5% to 6.5% as it estimated in October. The increased risk stems from the option recently given to French companies to delay the repayment of their loans by an additional year, which adds to the risk borne by the country’s banks.

“Given the lack of visibility that we still have today, we are starting to observe that many companies will use this delay option,” said deputy CEO Arnaud Caudoux during the bank’s earnings presentation on Thursday. “All else being equal, it increases a little bit the amount of losses we can expect.”

While still relatively low, rising defaults in the euro area’s second-largest economy may be a sign of wider distress to come as government pandemic support measures are withdrawn. Longer loan duration means higher probability of default, especially as Paris and 15 other departments in France went into renewed lockdown on March 20.

On Thursday, Bpifrance unveiled its first loss since its creation in 2012 as a result of increased provisions. The amount set aside to cover for bad loans surged 459% to 462 million euros ($546 million), leading the bank to record a loss of 121 million euros in 2020.

The default expectations do not concern state-guaranteed loans granted to large corporations, but only credit awarded to small and medium companies, which represent the bulk of the 130 billion euros in guaranteed credit issued since the beginning of the crisis.

France’s Public Bank Sees Rise in Default Risk for Covid Loans

To ease a transition back to normal and stem defaults, the government has introduced a new debt instrument backed by state guarantees that aims to bolster the balance sheets of firms. Finance Minister Bruno Le Maire recently has also said the government could examine transforming some of the existing government guaranteed loans into grants.

©2021 Bloomberg L.P.

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