France Nears Deal to Rescue Peugeot

France is close to agreeing a deal to prop up PSA Peugeot Citroën by providing between 5 billion euros and 7 billion euros of financial guarantees to the ailing carmaker's lending arm.

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The rescue plan, which needs approval from Brussels and has already provoked protests from state shareholders in Germany's Volkswagen, would be the most significant government intervention yet in the crisis engulfing many of Europe's mass-market carmakers.

People close to the talks said the deal could be announced this week.

In exchange for the funding, Peugeot has had to promise to appoint a workers' representative to its board, as well as a government-approved independent board member.

The imposition of a state-backed director will increase fears of ministerial meddling in the carmaker, whose independence has been jealously guarded by the Peugeot family – owner of 25.4 percent of the company and 38.1 percent of the voting rights.

France does not own a stake in Peugeot – unlike its rival Renault – but it has heavily criticised its plan to cut 6,100 domestic jobs and shut a plant outside Paris, the country's first such closure in 20 years.

However, it is not known whether the government will manage to secure fewer redundancies at Peugeot, which is struggling with plunging sales in the severely depressed French, Italian and Spanish markets and is burning through 200 million euros of cash every month.

Arnaud Montebourg, the leftwing industry minister, told the Libération newspaper on Tuesday that he wanted to reduce the company's job cuts by "hundreds". However, Peugeot's restructuring is still being examined by its works council and decisions on a reduction are unlikely before November.

Peugeot declined to comment.

The French state has been asked to offer guarantees to secure the financing of Banque PSA Finance, which funds Peugeot and Citroën dealers and car loans.

Peugeot's credit rating was downgraded by Moody's this month from Ba2 to Ba3, three notches below investment grade, leading to expectations of an imminent downgrade of the lending arm to "junk" status.

Analysts say that would raise Peugeot's borrowing rates and thus the loan rates it can offer customers, harming sales.

French officials say the plan is for 30 private sector banks to inject funds into Banque PSA, with the state providing a guarantee. They deny that it amounts to a state bailout, saying that the rescue covers only the finance unit.

France must secure approval from the European Commission to extend financial support and could be forced to attach conditions to the aid to comply with EU state aid rules. Paris has yet to notify Brussels of the intended support.

The German state of Lower Saxony, Volkswagen's second-largest shareholder, said it opposed the aid plan.

The move would be the biggest intervention by France's government in its car industry since 2009, when it extended Peugeot and Renault 6 billion euros of low-interest loans.