Crédit Lyonnais: Sting in the tail; More bad news from a 20-year-old bank bail-out; Crédit Lyonnais is not the only bad bank with poison in its long tail.

Crédit Lyonnais: Sting in the tail; More bad news from a 20-year-old bank bail-out; Crédit Lyonnais is not the only bad bank with poison in its long tail.

Nov 16th 2013 | PARIS |From the print edition

COUNTRIES struggling to return their bailed-out banks to normal (Britain and RBS spring to mind) will take little cheer from France this week. On November 13th the cabinet authorised borrowing €4.5 billion ($6.1 billion) next month to pay off the last of the debt incurred in rescuing Crédit Lyonnais two decades ago. The bank will have cost French taxpayers almost €15 billion in all.

Crédit Lyonnais built what was for a while Europe’s biggest bank in a mad dash for business that included lavish investments in Metro-Goldwyn-Mayer, a film studio, and Executive Life, an American insurer. The rescue was complicated from the outset in 1994 and grew more so with each fresh revelation of disaster.

The authorities set up two bodies to handle the rescue. The Consortium de Réalisation (CDR) took over dodgy assets from Crédit Lyonnais and tried to dispose of them. Etablissement Public de Financement et de Restructuration (EPFR) compensated CDR for losses. To pay for it, EPFR borrowed almost FFr130 billion (equivalent to €20 billion) from Crédit Lyonnais itself, in the process bolstering the bank’s balance-sheet, since EPFR had an AAA-rating. (A much trimmer Crédit Lyonnais was eventually bought by Crédit Agricole, and now operates as LCL.)

The idea behind this Byzantine structure was to let the public finances take the hit gradually, as EPFR did not have to repay Crédit Lyonnais in full until the end of 2014. Instead it paid a little back each year. Money from the sale of assets helped, though fines resulting from some of Crédit Lyonnais’s murky deals and their unwinding by CDR did not. Payment then ceased in 2007.

Ministers say they want to borrow now to repay the remaining debt because interest rates are likely to rise. That seems more than possible. Though the downgrade of France’s long-term debt by Standard & Poor’s on November 8th left markets unmoved, heavy borrowing that is set to continue into next year may not.

But those who hope this will put Crédit Lyonnais to rest are doomed to disappointment, for the bank left lawsuits as toxic as its assets. Take the case of Bernard Tapie, a colourful businessman, former football-club owner and briefly a cabinet minister. He says Crédit Lyonnais cheated him when it encouraged him to sell Adidas at a modest price in the early 1990s and promptly resold it at a whacking profit. Arbitration won him €403m in 2008 but lawmen are now investigating whether there might have been collusion involving Mr Tapie, his lawyer, one of the arbitration judges and senior figures in Nicolas Sarkozy’s government.

Crédit Lyonnais is not the only bad bank with poison in its long tail. Dexia, a Franco-Belgian bank bailed out in 2011, has cost French taxpayers around €6.6 billion. In July the Cour des Comptes, France’s national auditor, warned that its final resolution could well cost more and take longer than the planned nine years. If Crédit Lyonnais is any guide, it will.