Dexia Rescue Belgium Nationalizes Troubled Bank

The European banking crisis claimed its first victim on Monday: The Dexia group will be broken up. The Belgian government is paying 4 billion euros to acquire the company's operations in that country. Meanwhile, the Belgian, French and Luxembourg governments all plan to provide billions in guarantees.
A man walks past the French-Belgian bank Dexia Belgium headquarters in Brussels.

A man walks past the French-Belgian bank Dexia Belgium headquarters in Brussels.

Foto: Yves Logghe/ AP

The first major European bank appears to have become the victim of the second wave of the global financial crisis that first hit after the September 2008 collapse of Lehman Brothers. The Belgian-French Dexia bank is slated to be dismantled, with the government in Brussels assuming control of 100 percent of the company's Belgian operations, Prime Minister Yves Leterme said on Monday in Brussels. Earlier, the bank's board had accepted the government's offer.

The bank's strategy of borrowing money from financial markets rather than relying on deposits proved to be too risky during the current crisis. The bank isn't a financial giant -- it has a balance sheet total of around €520 billion -- but it is considered to be one of Europe's systemically relevant banks. Created after the merger of Belgian and French government lending banks in the 1990s, it became one of the world's biggest public finance banks. Ultimately, its exposure in Greece, from which it holds €3.8 billion in government bonds, Italy and struggling American municipalities led other banks to stop lending it money in the interbank financing system in recent days, forcing Monday's government action.

Under the plan, the Belgian state will pay €4 billion to acquire Dexia Banque Belgique, while at the same time providing €54 billion in guarantees for the bank's high-risk securities. "We have achieved the primary goal of preserving Dexia Banque Belgique and to outsource the risks," Laterme said after a meeting of his cabinet. Dexia's French public finance unit is to be sold to the state-owned Caisse des Depots et Consignations and Banque Postal, the banking arm of the French postal service. The company's Luxembourg operations are to be sold to investors including the government.

€90 Billion in Guarantees

The Belgian prime minister also announced the government would move securities with a total value of some €90 billion into a so-called Bad Bank that would then be guaranteed by the governments of Belgium, France and Luxembourg. For Belgium, that share would be 60.5 percent, or €54 billion. France would be responsible for 36.5 percent and Luxembourg for 3 percent.

In 2008, the three governments were forced to provide the beleaguered bank with some €150 billion in guarantees and €6.4 billion in fresh capital during the credit crunch at the time, which created the worst financial and economic crisis since World War II.

The governments of Belgium, France and Luxembourg agreed at the highest levels to a common position on the bank's rescue this week.

In exchange for the guarantees, Dexia will pay the countries €450 million, including €270 million to Belgium. Deducting this figure, the Belgian government is to purchase Dexia for the "appropriate price" of €3.73 billion, stated Belgian Finance Minister Didier Reynders. He said the aim was to ensure the bank's "continued existence." Reynders said the government did not intend to maintain its investment over the long term, but that it also didn't plan any immediate exit.

The bank, which has 850 branches in Belgium, but none in France, is the largest single creditor for French communities, cities and regions. On the French side, Caisse des Depots and La Banque Postal plan to assume the liabilities for over €70 billion that Dexia had lent to French municipalities.

Concerns in Germany

Dexia also has a smaller, specialized financing operation in Germany, where banking regulators have viewed the company critically in recent years. The municipal financier has lent close to €10 billion to German cities and municipalities.

There has been some concern that Dexia's operations here could damage the reputation of Germany's so-called Pfandbrief market for covered bonds for the public sector. With only a minimal amount of its own capital (in 2009, it had €330 million), the company has engaged in a massive banking business valuing close to €50 billion. In 2010 and 2011, German banking regulator BaFin stepped in and required the German unit's French mother company, Dexia Credit Local, to increase the capital in its Berlin subsidiary.

In addition, the regulator forced the French to sign two patronage declarations claiming responsibility for Greek liabilities held by the German unit worth €1.2 billion and ensuring that it would step in to provide the Berlin bank with liquidity if needed.

The future of the German unit is expected to be determined by Dexia Credit Local's new French public-sector owners.

dsl -- with wires
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