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Hollande Faces His Waterloo

I have been thinking about Peugeot (henceforth P). AEP at the Telegraph has a column today about how much the French business community hates President Hollande:

“The house is on fire. France is destroying 8,000 jobs a day,” said Pierre Gattaz, the new leader of business federation MEDEF. Mr Gattaz said the avalanche of “very dogmatic” measures imposed by Mr Hollande during his first months in power have put companies under enormous stress, and little has been done yet to reverse the damage despite a change in tone. “The government must step up to its responsibilities. Companies can’t till a soil full of rocks and brambles. It is private enterprise that will save France. The public sphere can’t create jobs, only companies can do that.” The chief executives of top firms including Peugeot Citroën, EADS, Sanofi and Publicis signed a joint letter to Les Echos, complaining that France is being suffocated by high taxes and an over-regulated system that is no longer fit for purpose.“Unemployment has reached record levels. The trade deficit is getting worse. Profit margins are the weakest in the eurozone. This calls for urgent measures.”

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Reading this story led me to think about P. For those of you who don’t follow European credit, P is a dog of large proportions. It is massively indebted and heading rapidly towards insolvency. It has EUR 10B in equity, and lost EUR 5B last year. Do the math. It is not fixable. It’s revenues are falling while its costs are rising.

Now, in the world of corporate credit, this would be no big deal, if P were located in, say, Detroit. It would go bankrupt; its creditors would take control; union contracts would be broken and labor costs would be slashed. But Paris isn’t Detroit, and in France companies the size of P simply do not go bankrupt. They are bailed out. But France is really not supposed to bail out P. It’s against the law. There would be a huge ruckus if P were nationalized. Germans would be very annoyed.

So President Hollande is stuck in a nasty recession, is being forced by Merkel to cut spending, and will soon face a big corporate trainwreck. The poor man doesn’t have a clue about economics (or corporate reorganization).

What will he do? Corporate bailouts are verboten. So it looks like he will have stand by as one of France’s largest employers goes bankrupt and lays off thousands of Socialist Party members. This won’t help his popularity.