Dexia Breakup Gathers Pace as Belgium Will Buy Local Consumer Lending Unit

Dexia SA (DEXB) is being broken up as Belgium agreed to buy the local consumer-lending unit, ending a 15-year cross-border experiment with France after Europe’s debt crisis deepened.

The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets, Finance Minister Didier Reynders said at a press conference in Brussels today after a weekend of talks. Dexia will sell assets, including its Luxembourg unit and its French municipal lending arm, to give the bad bank capital to absorb future losses.

The dismantling of Dexia, once the world’s leading lender to municipalities, became inevitable after concern over European sovereign debt holdings caused its short-term funding to evaporate. Dexia’s bailout, three months after it passed European Union regulators’ stress tests, brings the region’s banking crisis from the continent’s periphery to its center.

“Dexia is not an isolated problem,” said Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International who rates Dexia “reduce.” “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.”

Dexia fell as much as 36 percent in Brussels trading and closed down 4 cents, or 4.7 percent, to 80.5 cents, on concern the restructuring will leave shareholders with little of value. The stock resumed trading this afternoon after being suspended since Oct. 6.

Not ‘Comfortable Spot’

“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.”

The governments will guarantee as much as 90 billion euros of interbank and bond funding for 10 years for Dexia and its Dexia Credit Local unit. Belgium will provide about 61 percent, France about 37 percent and Luxembourg 3 percent of the backing. For Belgium, the guarantee equals about 15 percent of 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 following a meeting yesterday in Brussels with French Prime Minister Francois Fillon and Luxembourg’s Finance Minister Luc Frieden.

Luxembourg Sale

Dexia is in talks to sell Dexia Banque Internationale a Luxembourg to a group backed by Qatar’s royal family, Frieden told reporters today, while the government of Luxembourg will take a minority stake. The unit is valued at about 1.7 billion euros, according to KBW’s Lambert.

Dexia’s board instructed Chief Executive Officer Pierre Mariani to enter into 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 bank said in its statement.

The Belgian sale will cut Dexia’s short-term funding needs by more than 14 billion euros, the lender said in a statement. Selling the Dexia Municipal Agency would reduce short-term funding requirements by almost 10 billion euros.

There will be no merger for what remains of Dexia, Mariani told reporters in Brussels today. He said the bank had tried for the past three years to reduce its reliance on short-term funding, adding that the drying up of interbank lending markets had triggered the bailout, the bank’s second since 2008.

Banking Contagion

Rescuing Dexia 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.

Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.

“By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.

1996 Merger

Dexia emerged from the 1996 merger of Credit Local de France SA and Credit Communal de Belgique SA, the biggest municipal lenders in their respective countries. Unlike Credit Local, which relied exclusively on wholesale funding for its lending, the Belgian unit also operated a local retail bank.

Over the past decade, the Franco-Belgian bank sought to combine with another consumer lender in France and elsewhere in Europe to reduce its reliance on market funding. It failed to merge with Italian lender Sanpaolo IMI SpA in 2004.

“Dexia accumulated the worst errors,” said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris, and doesn’t own Dexia shares. “They were the experts of municipal lending. By getting late into businesses they weren’t able to handle, like securitization and bond insurance in the U.S., they bought all that others didn’t want to buy.”

Dexia’s 18-member board, equally split between France and Belgium, met to review the breakup plan yesterday, its third gathering in less than a month.

‘More Complex’

Among sticking points for Belgium and France were which assets to put in the bad bank and what share of borrowings each government should guarantee. Both countries tried to support Dexia without endangering their credit ratings. France is one of six countries in the euro-zone with a AAA rating.

“The situation is more complex than one where you have one bank, one country, one regulator,” said Kluis.

Further asset sales are likely, including Denizbank AS (DENIZ) of Turkey and Dexia’s fund-management division.

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.

In 2008, after injecting 6 billion euros, France and Belgium gave 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.

Moody’s Review

Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s Investors Service on Oct. 7 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.

Separately, KBC Groep NV, Belgium’s biggest bank and insurer by market value, agreed to sell its private banking unit to Qatari-backed Precision Capital for 1.05 billion euros. The sale, announced today, will increase KBC’s capital by about 700 million euros, the bank said.

A large chunk of Dexia’s 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.

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. CDC and La Banque Postale said today they are forming a joint venture to finance local governments, to be majority owned by La Banque Postale.

To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net Fabio Benedetti-Valentini at fabiobv@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.