Paris remains Paris. But in the deepening chill of late fall, even casual foreign visitors could detect the effects of the global financial crisis in this most beautiful of cities. Far fewer Japanese tourists these days admire the impressionist paintings at the Musée d'Orsay and snap surreptitious shots of the Mona Lisa at the Louvre, and less English is spoken in high-end restaurants.
The woes, of course, extend well beyond tourism and well beyond France. Both the country's banking system and its automotive sector required significant bailouts that President Nicolas Sarkozy was quick to offer. Unemployment ticked up from 7.6% to 7.7% in the third quarter -- European unemployment has long been higher than in the U.S. -- but probably rose much faster in the fourth quarter.
Those figures are all the more worrying because the memories of the Muslim riots are only three years old.
The fallout extended to M&A. Thierry Vassogne, a partner at Linklaters LLP in Paris, says the French market is the worst he's seen since he began practicing law in 1973, a sentiment other lawyers echo. As in the U.S., the credit markets have dried up, bringing the private equity market to a halt, and outside of banking, companies worried about their own stability have largely put dealmaking to the side.
But if, as Pierre Servan-Schreiber of Skadden, Arps, Slate, Meagher & Flom LLP in Paris wryly notes, the subprime crisis, like everything else originating in the U.S., eventually made its way to France, the French response has been distinct, shaped by the structure of its markets and the country's historic acceptance of aggressive government involvement in the economy. In the U.S., Wall Street and Detroit have long symbolized the poles of American capitalism, but in France, the government actually owned automaker Renault SA from 1944 to 1996 and still retains a 16% stake. Intermittently over the years, it has played a similar role in the country's banking sector.
That history did nothing to prevent the French public from panicking after the September bankruptcy filing of Lehman Brothers Holdings Inc. "No one anticipated before Lehman that we might not have a banking system in a fortnight," says Dominique Bompoint, a partner at Sullivan & Cromwell LLP in Paris. Like millions of other French investors, many individual lawyers and firms quickly moved to ensure that they had accounts at more than one bank in the event of a collapse.
Their choices were limited, since France has few small and midsized banks, with six institutions dominating the market: Crédit Agricole SA; BNP Paribas SA; Société Générale; Groupe Crédit Mutuel-CIC; Caisse Nationale des Caisses d'Epargne et de Prévoyance and Banque Fédérale des Banques Populaire. When Sarkozy tried to forestall bank runs by guaranteeing deposits, he didn't have to worry about a welter of smaller banks in the hinterlands, as U.S. regulators did. The French government bought a combined €10.5 billion ($14.6 billion) in securities from the six banks in October, and when Caisse d'Epargne announced a €600 million loss on trading bets gone bad in October, a sale to Banque Populaire was hastily arranged. The companies, both of which are mutually held and neither of which is publicly traded, had announced the talks a week and a half before news of the loss broke; they hope to complete the deal in March.
That left the effects of the crisis throughout Europe to contend with. In October, the French government teamed with Belgium and Luxembourg in taking over Dexia SA and Fortis SA/NV, whose operations Belgium and Luxembourg BNP soon thereafter agreed to acquire for €14.5 billion. The companies hoped to close the deal in December but had to postpone its consummation after the Brussels Court of Appeal ruled that Fortis had to put the deal to a shareholder vote by Feb. 12 or face a €5 billion penalty.
In the longer term, the extent to which European Union member states will accept a European financial regulator remains an unresolved problem, says Margaret Tahyar, a partner at Davis Polk & Wardwell in Paris. Significantly, France did not see foreign capital as part of the solution for its banking crisis. Thus Spain's Banco Santander SA this fall agreed to buy the 75% of Reading, Pa.-based Sovereign Bancorp Inc. that it didn't already own for $1.9 billion in stock and paid more than £1.9 billion ($2.8 billion) for two U.K. institutions (Alliance & Leicester plc and Bradford & Bingley plc) but made no such investments in France. Sarkozy, like other European politicians, has railed against sovereign wealth funds since he took office in May 2007, so it seems unlikely they will play the same role in recapitalizing the French banking sector as they have in the U.S.
Instead of taking money from other SWFs, Sarkozy is starting his own. He announced in late November that he would commit €20 billion of government money to a fund that state-controlled Caisse des Dépots et Consignations will manage. The fund has two divergent goals: getting capital to small- and medium-sized companies that otherwise couldn't access it and making investments in larger companies that might otherwise be vulnerable to foreign takeover.
The response to the crisis in France differs from those in the U.S. in ways other than tolerance of foreign capital. The automotive industry in both countries accounts for as much as 10% of the economy, but their fates have diverged dramatically.
The Detroit automakers' abysmal performance brought them to the brink of bankruptcy and fanned long-standing public resentment against both management and unions. But unions are pervasive in the French economy, and Renault and PSA Peugeot Citroën SA haven't faced the same intense pressures or disdain despite their own financial struggles. Sarkozy's promises of significant aid is stirring little controversy.
French carmakers, like other major companies, also haven't been conditioned to see court-supervised financial restructuring as a likely option. The French have had a Chapter 11-style of bankruptcy only since 2005, and Groupe Eurotunnel SA, the operator of the undersea rail tunnel between France and the U.K., has been the only large company to employ it thus far. Gide Loyrette Nouel's Olivier Puech is the only significant Paris restructuring lawyer at a large firm; his rivals, among them, Gabriel Saunier and Guilhem Bremond, run their own small shops.
And yet, says Hervé Pisani of Darrois Villey Maillot Brochier in Paris, "I believe we'll be facing bankruptcy-type situations at significant companies." That would make Saunier and Bremond hot commodities, either as co-counsel in such situations or as lateral hires.
The Paris firms themselves have thus far avoided layoffs and failures, though speculation about the possibility of such misfortunes abounds, especially at branch offices of U.S. and U.K. firms that face challenges in their own markets. Paris firms in general tend to be smaller, with fewer branch offices and associates per partner than the Anglo-American firms.
Darrois, for example, has 17 partners and 24 associates, according to its Web site, while rival Bredin Prat has 36 partners and 66 associates. Foreign firms tend to have modestly sized branch offices; Cleary Gottlieb Steen & Hamilton LLP, which represents both Dexia and BNP, has about 100 lawyers in Paris, while Davis Polk, Skadden Arps and Sullivan each have between 20 and 30 lawyers. And French corporate lawyers tend not to be quite as specialized as their counterparts in the U.S. and U.K., making the former less vulnerable to dramatic shifts in the markets they serve.
The lower overhead and small associate classes may help the Paris bar weather the crisis better than those of London and New York.
That helps explain why Paris corporate lawyers as a group seem less flummoxed than those in New York. Pisani even holds out some optimism for 2009. He expects to see few large deals, but, he adds, "The middle market, between €100 million and €500 million, is quite active."
Referring to the last market downturn, he says, "In 2002, everything froze. Now restructuring and litigation are busy. Annual turnover will probably not be as good as in 2007 and 2008, but there will be a lot of work."