France to raise 5 billion euros to boost defence sector capital

By Leigh Thomas and Mathieu Rosemain

PARIS (Reuters) - France's cash-strapped government aims to raise 5 billion euros ($5.4 billion) in additional public and private funding to shore up the finances of its undercapitalised defence companies, Finance Minister Eric Lombard said on Thursday.

President Emmanuel Macron called this month for a defence build-up in reaction to threats from Russia and to the United States reducing its security role in Europe.

However, the strains on France's public finances narrow its options to increase defence spending, which Macron has said needs to rise from 2% of economic output currently to 3-3.5% over time.

While France has several big defence contractors such as Thales, Safran and Airbus, the sector's industrial base relies heavily on 4,000 small and mid-sized firms, which tend to be undercapitalised and less profitable than in other sectors.

With many firms already struggling to keep up with existing defence orders, Lombard said that they would need additional equity of 1-3 billion euros in the coming years as France increases its defence spending.

"Public investors will invest 1.7 billion euros of capital which, thanks to co-investment with private investors, will allow investment of up to 5 billion euros in additional equity support for the sector," Lombard told a conference.

He said French retail investors could participate by contributing to a 450 million euro defence fund managed by the Bpifrance public investment bank through long-term savings investments offered by most banks and insurers.

Through that fund and others, chief executive Nicolas Dufourcq said that Bpifrance aimed to have investments in at least 100 defence firms, up from about 40 currently.

France has been leading European rearmament initiatives following signs of a potential Washington-Moscow rapprochement, which has heightened fears that Russia could expand its influence westward.

Bank of France Governor Francois Villeroy de Galhau has warned, however, that France cannot afford to write a blank check for defence spending, even if an increase is necessary.

"We cannot have a policy of spending whatever it takes regarding defence expenditure," Villeroy told BFM TV on Thursday, referring to the government's approach to supporting the economy during COVID-19 crisis.

($1 = 0.9223 euros)

(Reporting by Leigh Thomas and Mathieu Rosemain; Editing by Kevin Liffey)