Peugeot’s Cost-cutting Bankruptcy

ZeroHedge (via Save Capitalism) has a nice analysis about Peugeot’s upcoming bankruptcy, which will happen because the socialist government is doing its best to prevent Peugeot from cutting jobs losses.

Peugeot wants to make some cuts by closing a factory and laying off the workers – 14,00 people, which is 7% of their workforce. This is not a small number, but relative to the size of Peugeot and its budget, I would guess it is probably a “modest” reduction, and not quite what is necessary for the financial health of the company. Even though it is necessary, and apparently Peugeot is trying to minimize the number of layoffs, French President Hollande is opposed. The market responded by raising the cost of insuring against Peugeot debt, and the current cost of credit-default swaps indicates a 51% chance of bankruptcy.

Bloomberg has the full story:

PSA Peugeot Citroen (UG) bond-insurance costs surged to a record, trading as if the French automaker has a 51 percent chance of defaulting as it cuts thousands of jobs and closes a plant.

So wait, the layoffs are what is getting people nervous? This misleading opening presents the layoffs as the cause for worry, though the real reason is clarified later in the story:

Peugeot’s cash reserves allow it to “survive for one to two years,” said Xavier Caroen, a Zurich-based Kepler Capital Markets analyst who has a “hold” rating on the company. “We hope the French government lets them cut production and shut some sites in France, or they won’t have any earnings in the future,” Caroen said.

Healthy restructuring would not cause the market to run from Peugeot debt, but preventing that restructuring definitely raises the risk of a default in the future. The reporters of this story seem to think that cost-cutting is a sign of imminent failure, as there would be no other justification for closing a plant. If the company can survive for another year or two, why would they try to reduce losses at the cost of 14,000 jobs lost?

Maybe this is an insight into the minds of a socialist. The primary function of a company is to provide jobs, not to be profitable. Layoffs and restructuring hurt jobs, so they should never be done to maintain the health of the company. If things are so bad that Peugeot needs to cut jobs, then it must be – in the minds of the reporter – that the company is no longer viable.


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