FRANKFURT Devastated by the collapse of its iconic wine industry over a century ago, France may have inadvertently discovered the ideal way for central banks to aid an economy in crisis – open up the purse strings.
The Great French Wine Blight, caused by an infestation of phylloxera aphids, laid waste to much of the French countryside in the second half of the 19th century, killing more than a third of vines and threatening to wipe out the entire sector.
Enter the Banque de France, the country’s central bank. Research released on Friday by the European Central Bank, itself something of a throw-money-at-the problem place, found that funding action may have saved many businesses.
It was not just the vineyards. Wine provided an income for over a fifth of the French population and accounted for 6.4 percent of GDP before 1862, the paper said. That figure dropped by more than half by 1890 due to the blight, a pest accidentally imported from the United States.
Companies failed by the thousands but the ECB discovered that their lenders’ access to Banque de France funding may have reduced default rates by 10 to 15 percent for non-agricultural firms – and without an undue increase in risk for the central bank.
The finding is significant as central banks continue to debate how much access lenders should have to their funding. Too much may increase risk taking and constitute a subsidy, while too little could amplify the impact of crises.
In 19th century France, only lenders in certain regions had widespread access to Banque de France funding while others were mostly cut off, even as the disease spread quickly and the government budget made no attempt to mitigate the collapse of wine production.
Eligibility was based on a rather simple circumstance: physical proximity to a central bank branch office. Payment collectors had to physically go to the debtor’s place, thus only bills payable near a central bank branch were in reality eligible for its discount window.
“A counterfactual exercise shows that defaults would have been 10 to 15 percent higher in the absence of the Bank of France branch network, an economically significant magnitude,” the ECB paper said.
“We show that the central bank did not make losses on its extended discount operations,” it added. “The – ceteris paribus (all things being equal) – observed decrease in the default rate was thus due to central bank eligibility only and not to a quasi-fiscal subsidy by the central bank.”
(Editing by Jeremy Gaunt)