S&P maintains Dexia investment grade rating

7th October 2011, Comments 0 comments

Standard & Poor's cut its rating of troubled cross-border European bank Dexia by one notch on Friday to A-, maintaining it at investment grade despite efforts underway to bail it out.

"The downgrades reflect our view that tensions on the interbank market have constrained Dexia's access to wholesale funding markets," S&P said in a statement.

France and Belgium stepped in Tuesday to guarantee the financing of Dexia and signalled they intend split up the bank, making it the first European bank to be dragged down by the eurozone debt crisis.

Dexia, which had to rescued in 2008 due to the global financial crisis, is a major lender to French municipalities and has retail operations in Belgium and Luxembourg.

The bank has relied heavily on money market funding for its operations but such financing has become scarcer and more expensive for eurozone banks due to concerns over their sovereign debt exposure.

S&P said the downgrade also reflects "our belief that the group faces increased cash collateral requirements on hedges, which we believe increases the difficulty Dexia will face in reducing the short-term wholesale funding gap to below 80 billion euros by end-2011."

S&P kept Dexia on watch for further ratings actions "once we have more information about what the restructuring means for Dexia's operating banks and more details about accompanying support that the French and Belgian governments could provide."

It said the A- rating reflected the high level of support Dexia was likely to receive from the French and Belgian governments, which own 52 percent of the bank through direct and indirect holdings.

An extraordinary meeting of Dexia's board, on which the French and Belgian governments are represented, is set for Saturday to discuss further steps.

Trading in Dexia's shares was suspended on Thursday until Monday at the request of the Belgian securities regulator due to their extreme volatility amid developments regarding the bank's restructuring.

Dexia's shares plunged by 37 percent at one point on Tuesday before France and Belgium stepped in.

Luxembourg officials confirmed on Thursday that talks were well advanced on selling Dexia's local unit, Dexia BIL, to a foreign investor and should be wrapped up by the end of the month.

Fitch ratings agency said Friday it had put Dexia BIL on watch for a downgrade over the possible sale, noting that its current A+ rating is based heavily on the prospect of support from the governments of France, Belgium and Luxembourg.

Belgian finance minister Didier Reynders indicated Friday that his government is aiming to up Belgium's stake in Dexia.

"In the negotiations with our French partners, we are going to find ourselves putting up great guarantees, but also strengthening our position within Dexia bank in Belgium," Reynders told reporters after a cabinet meeting.

He did not spell out what exactly he meant by the government's "position," but said it would "take account of the state's concerns as a shareholder, but also those of the regions and other Belgian shareholders."

Reynders said it was too early to identify a preferred solution, after suggestions Belgium would look to nationalise the parts of the bank not broken off and sold.

The French government is looking at having a French government fund and a state-run postal bank take over the outstanding loans to local government authorities in the country.

© 2011 AFP

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