Dexia has become the first casualty of the 2011 banking crisis, with its Belgian arm being bought by the country’s government and Belgium, France and Luxembourg providing a €90-billion guarantee for its financing.
The bank, which specialises in local government financing and provides backing for more than 40 private finance initiative projects in the United Kingdom, ran into difficulties after its €3.4-billion exposure to Greece sparked concerns about its ability to absorb losses on the positions. Other banks no longer wanted to lend it enough money to keep operating. The bank was also one of the first to need a bailout in 2008 when it received assistance of €6-billion from France and Belgium.
The latest bailout is taking place at a time when the markets fear that Europe’s banking system could suffer severe losses because of the eurozone crisis. The International Monetary Fund has estimated that banks might need up to €200-billion as an extra capital cushion to cope with further losses.
After its embattled board met on October 9, Dexia announced on October 10 that Belgium would pay €4-billion for the operations in that country. Ratings agency Moody’s had already warned on October 8 that the burden of protecting Dexia could force a reduction in the AA1 rating assigned to Belgian government bonds.
“Moody’s intends to assess the potential costs and additional contingent liabilities that the government may incur in supporting the Dexia Group,” the agency said.
Belgian Finance Minister Didier Reynders said the bailout would lift the country’s debt from about 97% of economic output to 98% in an attempt to downplay the impact on Belgium’s finances.
France was adamant on October 11 that the support would not threaten its AAA rating. Finance Minister Francois Baroin also told French television that other banks would not need bailouts.
“No, I don’t think so, certainly not French banks,” he said when asked if other banks would need state hand-outs.
“We have one of the best standings in the world with ratings agencies and we will keep it.”
France is orchestrating support for French operations as two state-controlled firms — Caisse des Depots et Consignations (Deposits and Consignments Fund) and La Banque Postale, a subsidiary of the state post office — are helping to set up a joint venture to ensure that French local authorities, financed through Dexia, are able to receive the loans they need. The state of Luxembourg is helping to take control of the Luxembourg operations alongside other investors, including some from the Middle East.
France, Belgium and Luxembourg are also jointly guaranteeing the interbank and bond funding for a period of up to 10 years raised by Dexia SA and its subsidiary, Dexia Credit Local. The split is 60.5% Belgium, 36.5% France and 3% Luxembourg and is equal to a guarantee of €90-billion for 10 years.
Dexia chief executive Pierre Mariani, who was parachuted in during the 2008 banking crisis, appeared to blame government pressure for the size of the bank’s exposure to Greece and claimed credit for reducing the size of the bank’s balance sheet.
“Maybe our naivety was to accept too easily the requests by governments [to keep up exposure to Greece]. We never had a problem of solvency but one of liquidity, given our large portfolio of sovereign debt,” Mariani said. —