Luxembourg: France and Belgium stepped in Tuesday to guarantee the financing of the troubled cross-border bank Dexia, as its shares plunged spectacularly on reports that it was to be broken up.
The governments, shareholders in a bank that specializes in investing local government funds, acted as Dexia faced the threat of becoming the first major European institution to fall since the sovereign debt crisis began.
Shares in Franco-Belgian bank plunged more than 37% in early trade on Tuesday, later trimming the loss to around 20%, as the French and Belgian finance ministers issued their statement.
“In the framework of Dexia’s restructuring, the governments of France and Belgium, in coordination with our central banks, will take all necessary steps to ensure the protection of depositors and creditors,” they said. “To this end, they undertake to guarantee any finance raised by Dexia.”
Speaking at a meeting in Luxembourg, French finance minister Francois Baroin, compared the guarantee to the countries’ earlier €6.4 billion bailout of Dexia in 2008, when it was hit by the United States (US) sub-prime loan crisis. He said the governments would again “answer ‘present’,” if called upon, in order to protect “deposits in Belgium and loans to local governments.”
Dexia is the leading provider of local government financing in France.
“Whatever happens, we will put in place a quick and effective solution which will guarantee there will be no collapse for this vital activity,” Baroin said.
However, he did not spell out that there would be an eventual injection of state capital. “All we are saying is the states will be present like in 2008,” he said.
For his part, Belgian minister Didier Reynders, confirmed one of the options being considered was setting up a so-called “bad bank” to house Dexia’s riskiest debts while protecting its core business. “France and Belgium are ready to guarantee the financing of Dexia, in whatever form it takes,” he said. “We’ve spoken a lot about a ‘bad bank’ - It’s one of the options.”
Belgium’s government was to hold an emergency meeting to assess the situation in Dexia late on Tuesday, Reynders added.
Late on Monday, the Franco-Belgian bank had held an emergency board meeting which left open the possibility of it being broken up.
“The worsening of the European sovereign debt crisis and the tensions on the interbank market led Dexia to accelerate its restructuring plan in May 2011,” the bank said after a six hour crisis meeting in Brussels.
“However, in the current environment, the size of the non-strategic asset portfolio (so-called ‘legacy’) impacts the group structurally despite the good credit quality of its assets,” it explained. “This is why the board of directors asked the chief executive officer (CEO) to prepare the necessary measures to resolve the structural problems penalizing the group’s operational activities,” it said.
Jean-Michel Cappoen, the head of the Belgian financial sector union , told the news agency, “According to the information we obtained after this meeting, the whole bank is up for sale. It’s the end of the road.”
Dexia’s shares had already lost more than 10% on Monday on warnings of an imminent credit rating downgrade over fears about its liquidity and wider concerns of exposure to eurozone sovereign debt.
“This is the first bank that has really been hit by the current crisis,” said trader Dov Adjedj at BGC Aurel securities. “It was already weak due to its very high level of assets.”
The long-term financing deals with French local authorities could also be among the first part of operations to be hived off, banking sources told the news agency.
The €70 billion in such assets would likely be taken over by a special vehicle created by the French state-owned Caisse des Depots and the Post Bank, the French daily Le Figaro reported.
Some €95 billion in troubled non-strategic assets that are weighing heavily on the bank could be split off into a “bad bank” or other vehicle. Other assets would be split off and sold, including a Turkish banking unit, asset management services, private banking, and retail banking in Belgium.