As the European auto market heads for its biggest annual decline in 19 years, PSA Peugeot Citroen may be offered funding from the French government to rescue the car manufacturers’ in-house finance arm, Banque PSA.

According to reports from Bloomberg, a drop in car sales over the last year has seen Peugeot’s shares decrease 60%, instigating action from the French Government as it claims it is ready to support Peugeot’s in-house banking arm with an indirect bailout.

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Pierre Moscovici, French finance minister said the government is expecting assistance from French banks to strengthen Banque PSA, explaining "the state is examining the possibility of lending its support, with conditions and amounts remaining to be determined".

Bloomberg indicated a spokesperson with direct knowledge of the matter mentioned the French government and Peugeot’s creditors are arranging an agreement that would allow Banque PSA Finance to reschedule some €4bn (£3.25bn) of existing debt.

Undistorted and unsustainable

Ratings agency Standard & Poor’s has been watching for the level of state support made available to Banque PSA since warning of the possible downgrading of its credit rating in 2009 alongside RCI Banque, captive to the Renault-Nissan Alliance.

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This concern appeared to ease with the publishing of healthy growth for Banque PSA across 2010. Since then, however, PSA Peugeot Citroën has reported a global year-on-year downturn in registrations across both brands of 10.7% in 2011.

Arndt Ellinghorst, head of the automotive analysis team at Credit Suisse London said the prospective funding shows "that the state is there to keep them up and running" yet added "I’ve never seen a carmaker whose financial services is getting to a stage where it really cannot refinance."

Peugeot’s first-half earnings report detailed that Banque PSA Finance, the car manufacturers’ loans provider, has €5.76bn (£4.68bn) in credit lines from banks maturing in the next two years,

Jean-Baptiste Mounier, a Peugeot spokesman said that Peugeot is looking for ways to provide the unit "with a level of financing sufficient to ensure the continued smooth functioning" of operations.

Peugeot has dismissed bondholder’s requests to sell a stake as it endeavors to retain full control of Banque PSA Finance. Jean-Baptiste de Chatillon, chief financial officer, commented that in the event of a downgrade, the auto lender can boost funding through securitization.

Adrian Schmitz, a Ford spokesman, said the support "does not distort the level-playing field in Europe and free and fair competition in the auto industry".

With Peugeot’s refinancing costs higher than its competitors, Ellinghorst observed "it becomes more expensive to own a 208 than a BMW 3-Series in terms of cash payments for consumers", adding such a competitive position is "completely unsustainable."