After business lending slumped with the bankruptcy of New York-based Lehman Brothers Holdings Inc. in September 2008, U.S. and UK officials exhorted banks to keep extending loans, particularly to small companies, to bolster their economies. In France, President Nicolas Sarkozy created an office to lean on the banks to ensure money flowed. The results are striking. French lending to small and medium-sized companies -- with fewer than 250 employees -- never turned negative and is growing at an annual rate of about 4 percent, data compiled by the Bank of France show. In the U.S., the volume of outstanding loans to small businesses has fallen by $72.6 billion, or 10 percent, since the second quarter of 2008, according to the Federal Financial Institutions Examination Council’s website. In the U.K., such lending has dropped since October 2009, the Bank of England reported. The French example shows “arm twisting, when you get a temporary shock, may work,” said Vincente Cunat, a lecturer at the London School of Economics. ----Obama’s woes France outstripped every major economy in Europe in terms of full loan approval rates for small businesses for the January 2009 to June 2010 period, according to European Central Bank data. That included Germany, which created its own mediation office last year. A total of 13,359 companies got bank loans of 3.3 billion euros ($4.6 billion) between November 2008 and January of this year after the French mediator intervened directly or through the Bank of France, which oversees the country’s lenders. On the scale of the U.S. economy -- about 5.7 times the size of France’s, according to the International Monetary Fund - - that would be the equivalent of $26 billion in extra lending resulting from government intervention. “If you’re a small business, capital is still tough,” U.S. President Barack Obama said in Feb. 22 remarks in Cleveland. “Community banks that were the source of a lot of lending for small businesses are still working their way through some problems.” ----Mediator’s story Grosselin received his loan from five banks after the government intervened. Groupe BPCE SA, Societe Generale (GLE) SA, Credit Industriel et Commercial and Credit Agricole loaned him a total of 975,000 euros, while Paris-based BNP Paribas (BNP) SA provided 375,000 euros for tools and materials. “I got a call at home on a weekend afternoon about this guy who wanted to save a factory and couldn’t get financing,” said Gerard Rameix, the national mediator since September 2009 and the former secretary general for France’s stock market regulator. He then met with Grosselin and held meetings with banks in his office, housed in a tower block across from Paris train station Gare de Lyon to get them to agree to make the loans. “We avoided the worst,” Rameix said. “Without mediation, lending to small businesses might well have fallen.” French government bodies also chipped in directly, awarding Grosselin and his fellow investors a total of 2.5 million euros in loans and 600,000 euros in grants. The government loans were conditional on Grosselin getting financing from the banks. ----Temporary response The mediator’s “role is to incite,” Grosselin said. “I don’t know where the line between inciting and coercion lies.” Rameix said government mediation is largely a temporary response to an acute credit crunch and that the number of people coming in has dropped significantly since 2009. “If you’re thinking of structuring the banking system in the longer term, I’m not sure this would be very useful,” LSE’s Cunat said. Grosselin’s story may not be mirrored by all recipients, said Bo Becker, an assistant professor at the finance unit of Harvard Business School in Boston. “The track record in government intervening in the allocation of credit is very poor.” A Bank of France study published in its bulletin for the fourth quarter of 2010 showed that 11 percent of companies that got loans through mediation went into bankruptcy proceedings within a year. That compared with a 1.7 percent average for businesses as a whole. Companies unable to get loans through mediation went into bankruptcy at a 35 percent rate. ----Jobs saved “Mediation was very, very useful,” said Olivier Klein, chief executive officer of BPCE’s commercial banking business in Paris. “Only very rarely did the mediator exaggerate, where he wanted to save a company that wasn’t salvageable.” French banks point out that the lending was a very small part of their total loans. The “mediation showed that the lending system works well,” said Dominique Lefebvre, the chairman of Credit Agricole’s National Federation, a group of regional banks forming France’s largest lender by branches. In Grosselin’s case, he benefitted from a modern factory and a motivated workforce. The entrepreneur projects revenue this year of 26 million euros and a profit of 200,000 euros. The company had a loss in 2009 of 15 million euros after sales plummeted to 35 million euros from 71 million euros in 2006. “This company had been so starved it couldn’t buy any thread,” Grosselin said. “All it needed was financing to get the machines turning again. Without the mediator, 200 jobs would have just disappeared.” (Source: Bloomberg)