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State-guaranteed loans: real support or time bomb?

Published on June 02, 2020 - 2 mins reading time
Bank watch
Since the start of the coronavirus crisis, the government has set up an exceptional scheme to help businesses through the state-guaranteed loan (PGE). To date, 550,000 companies, most of them very small businesses, have applied for the loan. How does this scheme work? Is it a real solution for businesses, or a ticking time bomb that could put them into over-indebtedness?

How do state-guaranteed loans work?

These cash-flow loans are guaranteed by the State up to 70-90%, depending on the size of the company. They therefore offer banks maximum guarantees, since in the event ofnon-payment by the borrower, the State assumes most of the sums to be repaid. Nationwide, 300 billion euros of credit can be guaranteed by the State, equivalent to almost 15% of France's gross domestic product (GDP). The scheme will remain in place until December 31, 2020.

In practical terms, all companies, whatever their size or legal form, can apply for an EMP. However, certain non-trading property companies (SCI), finance companies and credit institutions are not included in this scheme. The amount of the loan can be equivalent to three months' sales in 2019, or two years' payroll for innovative companies or companies created since January 1, 2019.

No repayments are required in the first year, and monthly instalments can be spread over a maximum of five years. The scheme therefore seems ideal for supporting the cash flow of companies hit hard by the pandemic and containment measures.

Real support or ticking time bomb?

However, state-guaranteed loans represent no more than a one-off cash-flow facility that will have to be repaid in any event. Many sectors are likely to be affected by the crisis over the long term, and the risk of over-indebtedness is real. This is all the more true given that in recent years, even before the coronavirus crisis, the debt ratio of French companies has been rising steadily, not least because of the European Central Bank's low interest rates.

The risk of bankruptcies in the months and years ahead is therefore very real, and some major retailers have already gone out of business. Nevertheless, these emergency measures were necessary, as were the deferral of workloads and the short-time working scheme. The fact remains, however, that while they may have limited the immediate damage, they will not be enough to avert the shockwave of restructuring to come.