The Belgian, French and Luxembourg governments yesterday rode to the rescue of struggling bank Dexia for the second time in less than two weeks, pledging to guarantee money it borrows on the markets.
With interbank lending all but dried up, the three governments said that they would guarantee up to 4.5 billion euros (US$6.2 billion) in new money that Dexia aims to borrow on the markets.
The move “demonstrates the French government’s will to support a banking group, whether French or cross-border, [but] of systemic importance, once such a group needs a recapitalization or state guarantee,” French Finance Minister Christine Lagarde said.
Under the measure agreed during late night negotiations, the Belgian state will guarantee 60.5 percent of Dexia’s borrowing, France 36.5 percent and Luxembourg 3 percent.
The guarantee, which will last until Oct. 31 next year, will cover both Dexia’s borrowing on the interbank market and new issues of short-term bonds to institutional investors.
“This agreement that we have just reached is an expression of the three governments’ very firm support for Dexia,” Luxembourg Treasury Minister Luc Frieden said.
The latest move marks the second time in 10 days that the three governments have ridden to Dexia’s rescue. They hastily arranged a capital injection of 6.4 billion euros of taxpayer money into the ailing bank on Sept. 30.
“After the recapitalization, the guarantee is an important step for Dexia,” Luxembourg’s Frieden said. “It’s in the interest of the bank and its clients, who can rest assured about their deposits.”
Announcing the latest measures to support Dexia, Belgian Prime Minister Yves Leterme said that similar guarantees could be extended to other big Belgian banks.
Dexia was founded in 1996 in a merger of France’s Credit Local and Belgium’s Credit Communal. While it specializes in local government finance, it also has 5.5 million individual clients in several countries.
Dexia, whose corporate motto is “short term has no future,” ran into trouble supporting its US bond insurer FSA, which has suffered from exposure to the slumping US mortgage market.
Under the agreement, Dexia will not follow the fate of Fortis and be broken up, contrary to what some press reports said late on Wednesday.
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