France, Belgium and Luxembourg yesterday agreed a rescue plan for Dexia SA ahead of a planned board meeting expected to decide on a breakup of the first lender to fall victim to the eurozone crisis.
French Prime Minister Francois Fillon, Belgian Prime Minister Yves Leterme and Luc Frieden, the finance minister of Luxembourg, where Dexia has a large presence, had found a solution for the stricken Franco-Belgian bank, Leterme’s office said.
“The governments ... have reaffirmed their solidarity in finding a solution to secure the future of Dexia,” it said in a statement after two hours of talks at Egmont Palace in Brussels.
“The suggested solution, which is also the result of intense consultations with all partners involved, will be submitted to Dexia’s board of directors for approval,” Leterme’s office said without providing details of the rescue plan.
Dexia’s board was due to meet from 3pm in Brussels. It was forced to seek government help this week after a liquidity crunch sent its shares down 42 percent during the past week.
At stake in the talks is how much each government will have to contribute to help wind down Dexia, a thorny subject given that Belgium and France are already struggling to contain large deficits.
The need to recapitalize banks is emerging as another strain for European governments, whose budgets are already stretched. Belgium had a debt-to-GDP ratio of 96.2 percent last year, lower only than Greece and Italy among eurozone members.
The burden of bailing out Dexia led ratings agency Moody’s to warn Belgium on Friday that its “Aa1” government bond ratings could fall.
The negotiations to dismantle Dexia, which has global credit risk exposure of US$700 billion, are being watched closely for signs that Europe might be capable of decisive action to resolve its banking crisis.
Dexia, which used short-term funding to finance long-term lending, found credit drying up as the eurozone debt crisis worsened, a problem exacerbated by the bank’s heavy exposure to Greece.
Dexia’s near collapse stoked investors’ anxieties about the strength of European banks and coincided with growing talk about coordinated EU action to recapitalize banks across the continent.
Dexia’s overhaul will likely see its French municipal financing arm split from the group and merged with French state bank Caisse des Depots and Banque Postale, the French post office’s banking arm.
The Belgian government wants to nationalize Dexia’s largely retail banking business in Belgium.
Healthy units, such as Denizbank in Turkey, will be sold.
A “bad bank” supported by state guarantees will hold 95 billion euros (US$127 billion) in bonds, including 12 billion euros of sovereign debt of weaker eurozone periphery nations.
Including 7 billion euros of securities linked to US mortgages, France and Belgium might need to provide guarantees to cover up to 200 billion euros of assets, which would be more than 55 percent of Belgium’s GDP.
The key issues for yesterday’s talks were to be how to divide up the “bad bank” assets, how much Belgium should pay to nationalize Dexia’s Belgian banking business and whether others, such as Belgium’s regions, would be involved in yesterdays purchase.
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