French and Belgian Governments Pledge Billions in Guarantees for Dexia

Belgium has agreed to buy the local consumer-lending unit of Dexia SA for 4 billion euros ($5.4 billion) and will guarantee 60% of a so-called bank to set up for Dexia’s troubled assets. Dexia will sell assets, including its Luxembourg unit and its French municipal lending arm, in order to raise capital for the bad bank to absorb future losses.

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Concern over European sovereign debt holdings caused Dexia’s short-term funding to evaporate, making its dismantling inevitable. Its bailout comes only three months after it passed European Union regulators’ stress tests, leading many to question whether other European banks that passed the tests might also be in a similarly precarious situation. Furthermore, Dexia’s demise brings the euro zone’s banking crisis from the continent’s periphery to its center, with France being the region’s second-largest economy.

“Dexia is not an isolated problem,” said Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International. “The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm.”

The governments will guarantee Dexia as much as 90 billion euros of interbank and bond funding over the next 10 years, with Belgium providing 61% of funds while France provides 37% and Luxembourg provides 3%. Belgium’s guarantee equals about 15% of the nation’s gross domestic product.

“The three governments confirm they will take all the necessary measures to ensure the depositors’ and creditors’ safety,” according to an e-mailed statement from Belgian Prime Minister Yves Leterme’s office. Dexia shares were suspended last week, but resume trading in Brussels today. The stock fell 17% on October 6 before being suspended, declining 42% last week on concern that the breakup would leave shareholders with little value.

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“Investors in Dexia shares will be left with a ‘bad bank’,” said Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods in London. “The proceeds of the sale of healthy assets will help Dexia Holding absorb the losses on the so-called ‘toxic’ assets. This is not a comfortable spot for Dexia shareholders.”

Dexia is currently in talks to sell Dexia Banque Internationale a Luxembourg, valued at about 1.7 billion euros, to a group backed by Qatar’s royal family. Dexia’s CEO Pierre Mariani also plans to enter exclusive talks with Caisse des Depots et Consignations and La Banque Postale for an agreement on the financing of French local authorities and support for Dexia Municipal Agency from CDC.

The sale of Dexia’s consumer-lending unit to Belgium will cut its short-term funding needs by more than 14 billion euros, while selling the Dexia Municipal Agency would reduce short-term funding requirements by almost 10 billion euros. According to Mariani, there will be no merger for what remains of Dexia.

Dexia, once the world’s leading lender to municipalities, had a balance sheet with 518 billion euros of assets at the end of June, and is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland over the last 2 1/2 years. A large amount of Dexia’s troubled assets are on the balance sheet of Dexia Credit Local, a French unit that carries most of the bank’s 95 billion-euro bond portfolio, which includes 21 billion euros of Greek, Italian, Portuguese, Irish, and Spanish sovereign debt.

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Last week, when it was reported that a Qatari sovereign wealth fund was in discussions to buy Dexia Banque Internationale a Luxembourg for 900 million euros, it set off concern that Dexia’s most valuable assets might be sold at fire-sale prices. But Groep Arco, Dexia’s second-biggest Belgian shareholder, said on October 6 that it “opposes a forced sale of good units of the group at very low prices to foreign entities.”

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