Franco-Belgian bank Dexia agreed early yesterday to the nationalization of its Belgian banking division and secured state guarantees in a rescue that could pressure other eurozone governments to strengthen their banking sectors.
Belgium will pay 4 billion euros (US$5.4 billion) to buy Dexia Bank Belgium, the largely retail Belgian division, which has 6,000 staff and deposits totaling 80 billion euros from 4 million customers.
Dexia also secured state guarantees of up to 90 billion euros to secure borrowing over the next 10 years. Belgium would provide 60.5 percent of these guarantees, France 36.5 percent and Luxembourg 3 percent.
Photo: Reuters
Dexia’s announcement came after a board meeting that lasted about 14 hours from mid--afternoon on Sunday after France, Belgium and Luxembourg had agreed a rescue plan.
The extraordinary meeting had echoes of the dismantlement of financial group Fortis in October 2008 by the Netherlands, Belgium and BNP Paribas. Then, shareholders protested at the initial terms offered and only agreed on improved terms six months later.
The governments rushed to support Dexia after it became the first bank to fall victim to the two-year-old eurozone debt crisis, as a credit crunch denied it access to wholesale funds and sent its shares down 42 percent last week.
“We found an agreement on the fair division of the costs related to the management of the ‘rest bank,’” Belgian Prime Minister Yves Leterme told a news conference in the early hours of yesterday.
The likely burden of bailing out Dexia led ratings agency Moody’s to warn Belgium late on Friday that its “Aa1” government bond ratings could be cut.
The country had a debt-to-GDP ratio of 96.2 percent last year, lower only than Greece and Italy among eurozone members and on a par with bailout recipient Ireland.
Belgium Finance Minister Didier Reynders said that the deal would not push Belgium’s debt-to-GDP ratio above 100 percent.
Dexia, which used short-term funding to finance long-term lending, found credit drying up as the eurozone debt crisis worsened. The problem was exacerbated by the bank’s heavy exposure to Greece.
Dexia has global credit risk exposure of US$700 billion — more than twice Greece’s GDP — and its rescue has stoked investors’ anxieties about the strength of European banks in general.
The rescue -package came as the leaders of France and Germany agreed that European banks needed to be recapitalized, but papered over differences on how that would happen.
Paris wants to tap the eurozone’s 440 billion euro European Financial Stability Facility (EFSF) to recapitalize French banks, while Berlin is insisting the fund should be used as a last resort.
There were fresh reports over the weekend that big French banks BNP Paribas and Societe Generale might agree to capital injections as part of a Europe-wide plan to boost lenders’ financial strength. However, both banks denied such plans.
Dexia’s board also instructed the company’s chief executive to seek backing from French state bank Caisse des Depots (CDC). A consortium of CDC and La Banque Postale, the French post office’s banking arm, will ensure the financing of public entities in France.
It was not clear what would be the fate of healthy businesses, such as Denizbank in Turkey, its asset management operation and its funds custody joint venture with Royal Bank of Canada.
Its Luxembourg division is set to be sold.
Otherwise, Dexia will be left with a portfolio of bonds in run-off, which totaled 95.3 billion euros at the end of June, including 7.7 billion euros of junk class and about 7.4 billion euros of mortgage-backed securities.
Dexia’s shares have been suspended since Thursday afternoon. Belgium’s financial markets watchdog said trading was scheduled to resume yesterday.
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