Dexia collapse fears threaten euro bank dominos

4th October 2011, Comments 0 comments

France and Belgium will "step in" if needed to save the troubled Dexia bank, the Belgian finance minister said Tuesday, amid fears of collapsing dominos throughout Europe's ailing banking system.

The Franco-Belgian bank, already bailed out when the US mortgage market crashed in late 2008, is in danger of becoming the first major European banking institution to fall since the sovereign debt crisis began last year after emergency boardroom talks.

The French and Belgian governments will "step in if necessary" to bail out Dexia once more, Belgium's finance minister Didier Reynders said Tuesday, as banking sources claimed a break-up is on the cards.

The bank's shares lost more than 10 percent on Monday on warnings of an imminent credit rating downgrade and wider fears of bank exposure to eurozone sovereign debt.

Reynders discussed the bank's problems during a meeting with French counterpart Francois Baroin on the margins of eurozone talks in Luxembourg.

Dexia is heavily locked into long-term financing deals with French local authorities, and deals in this area could be the first part of the bank's operations to be hived off, banking sources told AFP.

The two finance ministers held their direct talks amid rising concern among eurozone counterparts at the knock-on effects for an under-capitalised banking system if Greece defaults and other sovereign debt risks emerge amid a sharpening economic downturn.

British Chancellor of the Exchequer George Osborne, who flies in to join a second day of talks gathering the full 27-state European Union early on Tuesday, warned Monday that the eurozone had to re-capitalise its banks as part of a multi-faceted solution to the Greek crisis.

French banks have been hit especially hard as ratings agencies have marked them down for having over-invested in risky Greek and other weak eurozone sovereign bonds.

Generally, all banks have increasingly been restricted to short-term funding sources on markets in recent weeks, further pushing up the cost of maintaining their liquidity, Moody's noted on Monday.

Fellow ratings agency Fitch also highlighted "structural weaknesses" with Dexia last week, warning of increasingly difficult access to financing.

Reynders insisted that savers' desposits are secure, adding: "The French and Belgian governments are behind their banks, whether it's Dexia or another one."

Since early 2010, the bank has been undergoing heavy restructuring ordered by the European Union's competition watchdogs.

Dexia chairman Jean-Luc Dehaene, a former Belgian prime minister and senior UEFA adviser, last week denied any plans to break up the group.

AlphaValue analyst Christophe Nijdam however said such an approach "could be interpreted as a positive sign" by the ratings agencies.

© 2011 AFP

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