Europe battles to save banks as crisis claims first victim

10th October 2011, Comments 0 comments

Belgium, France and Luxembourg decided on Monday to dismantle Dexia, the first bank to fall in Europe's debt crisis, as the eurozone prepared a battle-plan to protect its banking system.

It was the second time in three years that Dexia needed to be rescued. This time, Belgium agreed after board and cabinet meetings to pay 4.0 billion euros ($5.36 billion) to nationalise Dexia's domestic consumer-lending unit.

The dismantling of one of the largest lenders in France and Belgium only three months after it passed European stress tests brought the banking crisis from the continent's Mediterranean periphery right to its economic heart.

Belgian Prime Minister Yves Leterme said the takeover of Dexia Bank Belgium would secure the retail bank as he sought to reassure customers, saying they "can be sure and certain that their money is safe in their current accounts."

He added: "The taxpayer will not be called on to contribute too much as the risk is under control and the cost of the operation is relative."

But Dexia chief executive Pierre Mariani said clients made "significant withdrawals" from their accounts before the agreement was announced.

French Finance Minister Francois Baroin insisted that Dexia's rescue was an isolated case and that banks in trouble were already identified in the European stress tests this summer.

"Dexia is a particular case, it's not a general case," Baroin told French TV channel iTele.

Amid rising fears the crisis could sink the banking sector, German Chancellor Angela Merkel and French President Nicolas Sarkozy vowed on Sunday a response within weeks and insisted they were united on plans to shore up lenders.

Without announcing concrete details, Sarkozy promised, after talks with Merkel in Berlin, "lasting, global and quick responses before the end of the month."

The eurozone drama has sent shivers across the Atlantic over concerns it could trigger a new global recession, with US President Barack Obama calling on Europeans to act fast to stem the crisis.

British Prime Minister David Cameron, in an interview with the Financial Times on Monday, warned that "time was short" for eurozone leaders to solve the debt crisis and urged them to adopt a "bazooka" approach.

Baroin provided some details, saying a bank's exposure to sovereign debt risks will be included in addition to their results in any review and then central banks and regulators will establish the level of capital they need.

Banks needing recapitalisation will be able to do it through the markets or state agencies, he said, adding they may also get help from the eurozone rescue fund, the European Financial Stability Facility, once it is revamped.

A summit of EU leaders long planned for October 17-18 may be delayed until October 23 in order to give more time to polish a crisis response, diplomats said.

With a G20 summit looming on November 3-4, EU president Herman Van Rompuy and European Commission chief Jose Manuel Barroso said Europe needs to show it is "determined to do whatever necessary to overcome the current difficulties."

In a joint letter, they said they would also demand from the world's top economies "a constructive contribution to face the global economic challenges."

Dexia's break-up became inevitable after worries over Europe's debt caused a severe liquidity crisis. The rescue of a bank with a balance sheet of half a trillion euros -- bigger than the entire Greek banking system -- was seen as crucial to stop contagion.

The European Commission, the EU's anti-trust watchdog, is already monitoring the 2008 bailout deal and will have to approve the latest restructuring.

In an early favourable statement, EU competition commissioner Joaquin Almunia said the commission "welcomes the stabilising effect of the agreement on the banking group and for the financial system as a whole."

Belgian Finance Minister Didier Reynders said his government does not intend to keep control of Dexia Bank Belgium "indefinitely." The country was warned by Moody's ratings agency Friday that the Dexia crisis could affect its credit status.

In France, the government wants to create a new bank focused on local communities and owned by the Postal Bank and a public investment group, Caisse des Depots (CDC).

Investors from Qatar's royal family meanwhile have agreed to buy the group's Luxembourg unit, Dexia BIL.

Reynders said Belgium would guarantee the financing of a future "bad bank" retaining high-risk assets, to the tune of 60.5 percent, or 54 billion euros.

France will guarantee 36.5 percent while Luxembourg's share will amount to 3.0 percent.

The guarantees by the three states amounted to 90 billion euros, Reynders said, against 150 billion euros when it was rescued in 2008 during the global financial crisis.

Dexia's shares were suspended in Paris and Brussels on Monday, the third trading day in a row.

© 2011 AFP

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