France, Belgium step in to aid ailing Dexia bank
France and Belgium stepped in Tuesday to guarantee the financing of troubled cross-border bank Dexia as its shares plunged spectacularly ahead of confirmation that it is to be broken up.
The two states, shareholders in a bank that specialises in investing in local government funds, acted as Dexia faced the threat of becoming the first major European institution to fall victim to the eurozone debt crisis.
Shares in the Franco-Belgian bank plunged more than 37 percent in early trade on Tuesday, later trimming the closing loss to around 20 percent, as French and Belgian finance ministers issued a statement of support.
“In the framework of Dexia’s restructuring, the governments of France and Belgium, in coordination with our central banks, will take all necessary steps to ensure the protection of depositors and creditors,” they said.
“To this end, they undertake to guarantee any finance raised by Dexia.”
After an emergency late-night meeting, Belgium approved the creation of a so-called “bad bank” to house Dexia’s riskiest debts while protecting its core business — so confirming its dismantling.
Finance Minister Dider Reynders told journalists that “all that concerns the past, notably long-term loans that were struck with local authorities, will be guaranteed by the two countries.”
The goal is to isolate 95 billion euros ($129 billion) worth of risky assets that the bank has been trying to get rid of for years, he said.
“Our will is to consolidate, reinforce and secure the banking activity in Belgium, like our French colleagues will do in France,” Reynders said.
Belgium’s central bank also moved to reassure account holders, saying the central banks of both Belgium and France “fully support” Dexia.
As the Moody’s rating agency put Dexia on review for a downgrade, officials in Paris said a French state investment fund and the banking arm of the French postal service are jointly working on a plan to take on some of the activities of the ailing bank.
The Caisse des Depots and the state-owned Banque Postale plan to take over the financing of around 80 billion euros ($105 billion) of the French and Belgian local government assets now on Dexia’s books, CDC officials told AFP.
The officials said CDC director general Augustin de Romanet hopes to put a formal version of the plan to the board of governors “in the shortest time possible, doubtless in the next few days.”
French Finance Minister Francois Baroin compared the state guarantee to the countries’ earlier 6.4-billion-euro bailout of Dexia in 2008, when it was hit by the US sub-prime loan crisis.
He said the governments would again “answer ‘present’,” if called upon, in order to protect “deposits in Belgium and loans to local governments.”
Dexia is the leading provider of local government financing in France.
“Whatever happens, we will put in place a quick and effective solution which will guarantee there will be no collapse for this vital activity,” Baroin said.
However, he did not spell out that there would be an eventual injection of state capital.
“All we are saying is the states will be present like in 2008,” he said.
Late on Monday, the Franco-Belgian bank had held an emergency board meeting which left open the possibility of it being broken up.
“The worsening of the European sovereign debt crisis and the tensions on the interbank market led Dexia to accelerate its restructuring plan in May 2011,” the bank said after a six-hour crisis meeting in Brussels.
“However, in the current environment, the size of the non-strategic asset portfolio (so-called ‘legacy’) impacts the Group structurally despite the good credit quality of its assets,” it explained.
“This is why the Board of Directors asked the CEO … to prepare the necessary measures to resolve the structural problems penalising the Groups operational activities,” it said.
Jean-Michel Cappoen, the head of the Belgian financial sector union Setca, told AFP: “According to the information we obtained after this meeting, the whole bank is up for sale. It’s the end of the road.”
Dexia’s shares lost more than 10 percent on Monday on warnings of an imminent credit rating downgrade over fears about its liquidity and wider concerns of exposure to eurozone sovereign debt.
“This is the first bank that has really been hit by the current crisis,” said trader Dov Adjedj at BGC Aurel securities. “It was already weak due to its very high level of assets.”