The beleaguered bank secures state guarantees worth euro 90 billion in bailout.
Europe’s ongoing sovereign debt and interlinked banking crises claimed their first victim in the so-called “core” of the eurozone, with Franco-Belgian bank Dexia agreeing to the nationalisation of its Belgian banking division early on Monday. The beleaguered bank, whose large exposure to Greek debt saw its wholesale funding dry up last week, also secured state guarantees worth euro 90 billion in a bailout that has upped the pressure on other eurozone governments to recapitalise their banking sectors.
Once one of the world’s leading lenders to municipalities, Dexia’s shares plummeted by 42 per cent last week, leading to marathon talks between the governments of France, Belgium and Luxembourg with the bank’s board of directors in a rescue bid on Sunday.
Following the meetings, Brussels has announced it will take over Dexia’s Belgian unit, which includes large retail operations, for four billion euros.
The sale would cut Dexia’s short-term funding requirements by more than euro 14 billion, the bank said in a statement.
The part-nationalisation is only the first step in the dismembering of the bank. The bank’s board has also told the management to negotiate a spin off of its French municipal loans business in partnership with Caisse des Dépôts et Consignations, a French sovereign wealth fund and Banque Postale, the banking arm of the French postal service.
Additionally France, Belgium and Luxembourg have agreed to jointly underwrite Dexia’s financing needs for up to euro 90 billion over 10 years. The move is somewhat of a repeat of 2008 when the three governments stepped in with euro 150 billion of guarantees to tide over the bank following the souring of a huge portfolio of subprime loans it owned.
Belgium will provide 60.5 per cent of the guarantee, or euro 54 billion, with France contributing 36.5 per cent and Luxembourg three per cent.
The guarantees will help finance what remains of Dexia after the Belgian and French divestments. Other sell-offs, including the bank’s Luxembourg unit, are also being mulled.
The left over “bad bank” will consist of a bond portfolio worth around euro 100 billion which has weighed down Dexia’s balance sheet since its 2008 bailout.
But the Franco-Belgian bank had, in fact, received a clean chit of health only three months ago in EU stress tests. Although the reliability of those tests is now suspect, Dexia chairman Jean-Luc Dehaene told reporters on Monday that it proved that Dexia faced a liquidity rather than solvency crisis, meaning that it was not bankrupt, but just didn’t have the ready cash it needs in the short-term.
Dexia’s misfortunes are a warning sign of a deeper malaise in Europe’s banking sector and underscore the fears that centripetal tendencies are pushing the eurozone’s peripheral crises ever closer to the core. In response, the European Commission is expected to unveil plans for an EU-wide coordinated push for bank recapitalisation later this week.
On Sunday, French President Nicolas Sarkozy and German Chancellor Angela Merkel held a meeting where they acknowledged that the region’s banks still need billions of euros to cushion against a possible default by Greece and contagion to other larger countries like Italy or Spain.
The leaders said that they would announce a package of reforms in time for a Group of 20 nations meet in early November, but were not immediately forthcoming with any details. The International Monetary Fund has estimated that Europe’s banks may need up to 300 billion euros more capital if the debt crisis widens.
France and Germany are reportedly at odds on how to best shore up bank finances. Paris is said to want to use the EU’s bailout fund, the European Financial Stability Facility for the purpose while Berlin insists that the fund should be used only as a last resort, if the banks are not able to raise more money from their national governments.
Dexia’s rescue is already sending alarm bells ringing in France with some fearing that a large bailout for the bank could threaten the nation’s triple A credit rating, a development the French government is desperate to avoid.
Dexia’s effect on Belgium is potentially even more deleterious. The country’s debt is 97.2 per cent of gross domestic product (GDP), the third highest in the euro zone, after Greece and Italy. Moody’s warned last week that it could downgrade Belgium’s credit rating if support of Dexia lifted Belgium’s debt and investors started pushing up its borrowing costs.
The full impact of Dexia’s collapse will only become clearer in the coming days. The bank has a global credit exposure of about $700 billion — more than twice Greece’s GDP.
