How the French Banks Were Saved.

• Author: Dubel, A.

Christine Lagarde's main job as French finance minister from mid-2007 to mid-2011 was to avert an even bigger crisis of the French banking system.

After the Greek sovereign default in early 2010, not only French niche banks such as Dexia that were hit early were at risk, but so were the large private and cooperative network banks. This included Europe's largest bank by assets, BNP Paribas, that had been heavily engaged in the EU periphery, both through portfolio lending and direct investments.

In a concerted effort by Lagarde at the French Ministry of Economy and Finance, Dominique Strauss-Kahn at the International Monetary Fund, and Jean-Claude Trichet at the European Central Bank, France pulled out all the stops to convince Germany to avoid a Greek sovereign debt restructuring.

The European Financial Stability Facility was set up in the spring of 2010 to roll over Greek government debt. Instead of the initially proposed approach by the Institute of International Finance-representing the major private banks-of a partial roll-over with banks extending some of their exposures due, the EFSF became a full bail-out mechanism for banks. At the ECB, Trichet engaged in a Greek government bond purchase program called the Securities Markets Programme, purchasing bonds at 80 to 90 cents to the euro, giving banks another easy exit from those bonds that were too long-term to be rolled over immediately into the EFSF.

However, resistance in Germany, where banks were hit less hard by the Greek crisis, to continuing bailouts at taxpayers' expense grew, and by June 2011 the French banking association found itself coerced into proposing its own restructuring plan for what was left of its Greek exposure, which already was down from US$85 billion to less than US$60 billion. The German Ministry of Finance proceeded to organize Greek government bond haircuts.

When Lagarde was moved over to the IMF to replace Strauss-Kahn in July 2011, the main work regarding the European fiscal policy response to the Greek crisis had essentially been done, as a certain balance between French and German interests had been achieved. France's interest shifted to maintaining control of the IMF, so that the Fund would remain heavily engaged in co-financing the bank bailouts together with the Europeans, despite the fierce opposition of the IMF staff pointing to the Fund's statutory lending limits. No wonder that resistance by stakeholders in the IMF against these enormous and...