If the French bank had to sell all its investments and bad loans and add them to its 1994 losses it would splatter £8bn worth of red ink, or 1 per cent of French GDP, over its bombed-out balance sheet. Instead the government has taken over the debts, allowing Crdit Lyonnais to forecast a profit this year.
The bank's 1992 and 1993 annual reports with hindsight read like works of fiction. There is a growing suspicion of official complicity in minimising the scale of the disaster until the gory detail could be concealed no longer.
Jean Peyrelevade, the unfortunate chairman (and non-executive director of Barings, to boot) brought in to sort out the mess, said until recently that it was entirely due to bad lending decisions by managers. Now the government is talking fraud, and the hunt for scapegoats has begun in earnest.
But the real story lurks elsewhere, in the relationship between Mr Haberer's regime, its customers and the government. The parliamentary commission of inquiry which reported last year, at a time when Crdit Lyonnais was wrongly thought to be on the mend at last, may not have reached anywhere near the bottom of it. Mr Haberer, a former top Treasury mandarin, was supported in a grandiose four year splurge of property loans and disastrous investment by the economy minister, the late Pierre Brgovoy.
The government saw Crdit Lyonnais as a vehicle for extending the influence of a state bank in industry, though at a time of rising cultural protectionism in France it can hardly have imagined the MGM film studio in Hollywood would become part of its industrial strategy. Giving a civil servant turned banker massive capital backing turned out, predictably, to be a recipe for lending badly to political allies and dubious businessmen.
While this story was unfolding, Jean-Claude Trichet, now governor of the Bank of France, was running the Treasury. Jacques de Larosire, now head of the European Bank for Reconstruction and Development, was in charge of the Bank of France. And Herv Hannoun, deputy governor, was chef de cabinet to Mr Brgovoy. Products of the Grandes Ecoles and the upper reaches of the French administration, they were typical of the tightly knit French business and political caucus.
Imagine, if you like, a Barings controlled by the government, run by an ex-Treasury official, supervised by one of his former colleagues - and then bailed out with government guarantees. The political row that would cause in the UK would be Barings, BCCI and Johnson Matthey rolled into one.
Suspicions abound in France that the real reason why Crdit Lyonnais is being rescued and not broken up is because it makes it easier to keep the lid on the story of what happened. As Alain Madelin, France's minister for small and medium companies, admitted in a radio interview, Barings is "childs play compared to the Crdit Lyonnais affair."
The bank is too big and too close to the core of the French economy to be allowed to fail completely, which would leave millions of depositors in serious jeopardy. A bank of such dominance would certainly have been propped up, at least temporarily, in the UK or the US, where there have been unsung bail-outs of the banking system in recent years, though not of individual large banks.
In Britain, exit from the exchange rate mechanism and the subsequent drop in interest rates was very helpful in shoring up the banks by taking the pressure off their customers. The United States deployed a more sophisticated strategy, reducing real short term interest rates to zero, allowing banks to borrow cheaply and make huge profits in the bond markets, thus restoring their capital. But such devices would not have saved Crdit Lyonnais, because its losses were too horrendous. This is a bank so bad that it deserves to be broken up or sold, rather than relieved of its problems and encouraged to compete again in an already overcrowded banking market. The European Commission, which is checking whether the rescue breaks state aid rules, should certainly not let this one go through on the nod.
Weaker currencies run for cover
Rumours are at the heart of any panic. They swirled around the European currency markets with a vengeance yesterday. After nearly three weeks during which Euro-politicians had claimed that the problem was the dollar and they had simply been caught in the crossfire, the US currency sat quietly in the trenches yesterday - while weaker European currencies ran for cover against the mark.
The window of opportunity for the obvious course of action - for Germany to cut interest rates and the US and UK to raise rates, in a co-ordinated move - has passed for the time being. What are the other options?
Intervention would be a waste of money. Spain and Ireland were both claimed in the market to be on the point of leaving the Exchange Rate Mechanism. But as the peseta is practically floating anyway, it is not clear that it would help relieve the pressure.Another theory was that Spain and Italy were on the verge of introducing capital controls - a bit more unlikely, but Spain and Portugal did use controls during the 1992 crisis.
The rumour that failed to make an appearance, but would have been good to hear, was that the governments whose currencies were under pressure would take the crisis as a signal that the time had come for serious fiscal reform. But the Italian government barely scraped its modest budget proposals through. For countries like Spain, Belgium and Ireland there is no political will to tackle big deficits.
Britain's case is different: the public finances are healthy. But investors look at the political prospects and reckon it would be just as well to stay out of pounds. With the European election season stretching from here to at least May, and far longer in Britain's case, the chance of calm returning to the markets in the next few weeks is slim. Meanwhile the drive from French and Mediterranean politicians for international policy makers to investigate ways of preventing speculation - such as a tax on capital flows - is gathering pace. It is the wrong reaction and will not help stabilise weak currencies.Reuse content