The Casino Group’s setbacks are a spectacular illustration of the impact of a sustained rise in interest rates on businesses. In addition to the fragility of its financial structure and its risky international strategy, the group suffers, outside the areas where it is a dominant player (mainly in Paris), from a price positioning and a lack of modernization of the stores which do not allow it not to win new customers. With debt classified as speculative by rating agencies, Casino had to pay a large premium to its creditors.
However, this debt remained sustainable as long as base rates remained low. Beyond the case of Casino, “free” money allowed less productive companies to maintain their activity; worse, their creditors were tempted by a “gambling for resurrection”ie an extension of the financing of “zombie” companies by betting on a possible recovery of the debtor to recover their investment.
Expensive process
More generally, the abundance of liquidity and low interest rates were detrimental to the selectivity of investments. Indeed, arbitrating between two investments is a costly process that requires a managerial effort to determine which is the most economically relevant. But when the two projects could easily be financed, the companies saved themselves these efforts. Promising projects coexisted with other more risky ones, ultimately weighing down the company’s overall productive performance. Similarly, investors could play on all the slots of the start-up casino roulette…
Persistently low rates also changed competitive conditions and therefore the incentive to innovate. Indeed, a company in a monopoly position could finance at low cost the acquisition of any emerging competitor to maintain its position, instead of defending it by innovating. Economists have also been able to show that more complex mechanisms could be set in motion: the low cost of money initially allowed leaders to innovate without counting the cost, which ended up discouraging competitors, atrophying innovation and reduce productivity gains, the slowdown in which has affected most advanced countries for more than two decades (“Low Interest Rates, Market Power and Productivity Growth”, Ernest Liu, Atif Mian, Amir Sufi, Econometrica2022).
Employees, the first victims
The rise in interest rates signals the partial end of these perverse effects. Casino’s debt has become unsustainable, resulting in a recapitalization plan whose offers were filed on Tuesday July 4th. The new shareholders will probably undertake a vast restructuring: sale of stores, closure of the most fragile and strategic change in those retained. In all three cases, the employees risk being the first victims, but the apparent productive performance of the group should improve, and in its wake those of the whole large food trade in France.
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