By Fabio Benedetti-Valentini – Oct 8, 2011
Dexia SA (DEXB)’s board meets this weekend to study options to dismantle the French-Belgian bank that has brought Europe’s sovereign debt crisis to the heart of the region’s financial system.
While France and Belgium have rushed to protect their local units, hurdles to an agreement remain as they wrestle over responsibility for assets hit by the crisis that has caused the bank’s short-term funding to evaporate. Dexia’s troubled assets are being folded into a “bad bank” and could amount to as much as 190 billion euros ($256 billion).
Rescuing Dexia — the first victim of the debt crisis at the core of Europe — has become critical to preventing contagion in the region’s banking industry. Dexia’s balance sheet, with total assets of about 518 billion euros at the end of June, is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland in the last 2 1/2 years.
“The governments have to reach a deal this weekend or we’ll see trouble on the interbank market next week,” said Michael Rohr, a banking analyst with Silvia Quandt Research GmbH in Frankfurt. “Investors are looking at which banks have large public finance operations like Dexia.”
Paris- and Brussels-based Dexia has retail branch networks in two European Union founding nations — Belgium and Luxembourg — and is a former world leader in municipal lending.
The 18-member board, equally split between France and Belgium, may review a plan under which Dexia would set up a bad bank for its troubled assets, hive off its French municipal loan book into a venture with state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for units such as its Belgian bank, Denizbank AS of Turkey and its asset- management division.
The board meeting — Saturday or Sunday — will be the third in less than a month, after those on Sept. 27 and Oct. 3.
Among sticking points for Belgium and France may be which assets to put in the bad bank and what share of the lender’s borrowings each government should guarantee.
“The situation is more complex than one where you have one bank, one country, one regulator,” said Cor Kluis, an Utrecht- based analyst at Rabobank International with a “reduce” recommendation on Dexia. “The process will probably take longer than expected and I don’t know if they’ll be able to reach a solution this weekend.”
Dexia dropped 17 percent in Brussels on Oct. 6 before being suspended, and will resume trading on Oct. 10. The stock has fallen 42 percent in the past week on concern that the breakup will leave shareholders with little of value. It has plunged more than 90 percent since the 2008 bailout.
“Once you go on this road, it won’t end well for shareholders,” said Kluis. “Governments aren’t there to save shareholders.”
Standard & Poor’s on Oct. 6 downgraded the credit ratings on three units, Dexia Credit Local, Dexia Bank and Dexia Banque Internationale a Luxembourg, citing the group’s limited access to wholesale funding markets. The ratings are on credit watch with “developing implications,” S&P said.
France and Belgium are coming to Dexia’s rescue three months after it got a clean bill of health in European Union regulators’ stress tests, and three years after they injected capital to save the company during the 2008 credit crunch.
In 2008, after injecting 6 billion euros, the governments provided Dexia guarantees of as much as 150 billion euros. Belgium covered 60.5 percent of the guarantees, France 36.5 percent and Luxembourg 3 percent.
Now, negotiations are again focused on who bears what part of the guarantees for the bank.
“It’s complicated for the states to reach an accord,” said Benoit Petrarque, an analyst at Kepler Capital Markets in Amsterdam. “There are budgetary constraints and no one wants to invest capital.”
Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s Investors Service because of rising funding risks for euro-area nations with high levels of debt and additional bank support measures that are likely to be needed.
The review will focus on the vulnerabilities of Belgian public debt in the current euro-area sovereign crisis and potential costs and contingent liabilities that the government may incur in supporting Dexia, Moody’s said in a statement yesterday. Moody’s will also assess how the risks for the growth outlook of the economy and the government’s fiscal and economic plans may impact the country’s debt trajectory.
A large chunk of the troubled assets are on the balance sheet of Dexia Credit Local, a French unit. Dexia Credit Local carries most of the bank’s 95 billion-euro bond portfolio, which includes 21 billion euros of Greek, Italian, Portuguese, Spanish and Irish sovereign debt. Dexia’s municipal lending units in Italy and Spain, which it agreed to dispose of to win European Commission approval for its 2008 bailout, are also on the French unit’s balance sheet.
“The fair distribution of the burden is a very sensitive and crucial element in the negotiations,” Belgian Prime Minister Yves Leterme said on RTL radio on Oct. 6. “To save Dexia, we need a fair division of responsibility.”
Belgium plans to nationalize Dexia Bank Belgium NV, Leterme told labor unions on Oct. 7, according to ACV-CSC, a workers’ union. Leterme has said he’ll do whatever it takes to safeguard the bank.
Dexia said on Oct. 6 that an investor is interested in its profitable retail and private banking unit in Luxembourg. Belgian daily L’Echo reported that a Qatari sovereign wealth fund was in discussions to buy the unit, Dexia Banque Internationale a Luxembourg, for 900 million euros, without saying where it got the information.
That announcement set off concern that Dexia’s most valuable assets will be sold at fire-sale prices to international buyers in response to a temporary funding squeeze.
Groep Arco, Dexia’s second-biggest Belgian shareholder, said on Oct. 6 that it “opposes a forced sale of good units of the group at very low prices to foreign entities.”
In France, state-owned CDC and La Banque Postale may join with Dexia to create a new company to take over the French municipal lending arm, according to a statement on Oct. 6 from a postal union, whose representatives attended a board meeting where the plan was presented. Paris-based La Poste, the parent of Banque Postale, declined to comment, as did CDC and Dexia.
“Dexia is not an isolated problem,” said Rabo’s Kluis. “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.”