France, Belgium Pledge Dexia Help as Lender Weighs Breakup

France, Belgium Pledge Dexia Help as Lender Weighs Breakup
Pedestrians walk past the headquarters of Dexia SA, on Place Rogier, in Brussels. Photographer: Jock Fistick/Bloomberg

The French and Belgian governments pledged to support Dexia SA as shares of the lender plunged in Brussels on concern it will require a second government bailout.

France and Belgium will take “all necessary measures” to protect clients and will guarantee all Dexia’s loans, French Finance Minister Francois Baroin and Belgian Finance Minister Didier Reynders said in a statement today. Belgium’s cabinet will meet in Brussels tonight to review the options for the lender. Both governments have stakes in the bank following its bailout in 2008.

Dexia’s board met yesterday to discuss a possible breakup of the lender after the sovereign-debt crisis reduced its ability to obtain funding, said three people with knowledge of the talks, who declined to be identified because the negotiations are private. The lender may create a “bad bank” for its troubled assets, one of the people said. A breakup would mark the clearest evidence yet that the banking crisis spurred by Europe’s sovereign-debt woes is spreading to the core of the euro-area from the periphery.

“The expected restructuring will probably not allow minority shareholders to benefit from the fundamental value of healthy activities,” Jean Sassus, an analyst at Oddo Securities, said in an e-mailed note. “A valuation of the whole group has now become unrealistic.”

The shares slid 22 percent, the steepest decline since September 2008. The stock slid 29 cents to 1.01 euros in Brussels, cutting Dexia’s market value to 1.96 billion euros ($2.6 billion).

‘We Will Act’

“If it is needed, we will act,” Belgium’s Reynders told reporters today in Luxembourg. “We need to read all the proposals coming from the bank.”

The lender may hive off its French municipal loan book into a venture funded by state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for its Belgian bank, Denizbank AS in Turkey and its asset-management division, one of the people with knowledge of the talks said.

“In the current environment, the size of the non-strategic asset portfolio impacts the group structurally,” Dexia said in a statement today. “This is why the board of directors asked the CEO, in consultation with the relevant governments and the supervisory authorities, to prepare the necessary measures to resolve the structural problems.” The bank didn’t elaborate.

Contagion Warning

State shareholders will support Dexia to allow it to roll out measures “in an orderly manner and under the best conditions,” Dexia said, without elaborating.

Belgian Prime Minister Yves Leterme and the vice prime ministers of his caretaker government will hold a meeting starting at 8 p.m. to discuss options for the lender, Jerome Hardy, a spokesman for Leterme, said by phone today.

The European Banking Authority will review Dexia at a private meeting tomorrow, chairman Andrea Enria said at the European Parliament in Brussels. It’s important that Dexia’s funding woes are fixed as soon as possible otherwise they “could spread to other banks,” he said.

Dexia posted a 4 billion-euro loss for the second quarter, the biggest in its history, after writing down the value of its Greek debt. Once the world’s biggest lender to municipalities, it received a 6 billion-euro bailout from Belgium, France and its largest shareholders in September 2008 following the collapse of Lehman Brothers Holdings Inc.

Moody’s Review

“Dexia is an extremely complicated file,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a “hold” rating on the shares. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”

Moody’s Investors Service put Dexia’s three main operating units on review for a downgrade yesterday on concern the lender was struggling to fund itself.

“Dexia has experienced further tightening in its access to market funding,” Moody’s said in a statement. “Dexia’s collateral postings have increased due to substantial market volatility.”

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

First Bailout

That reliance on wholesale funding hobbled the bank as money markets seized up after Lehman collapsed, and Dexia turned to emergency funding from central banks. It was the biggest euro-area user of emergency loans from the U.S. Federal Reserve, borrowing a $58.5 billion as of Dec. 31, 2008, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank’s existing shareholders, which include Caisse des Depots et Consignations and Belgium’s Holding Communal SA, provided an additional 3 billion euros.

Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

Stress Test Passed

Dexia had sought to reduce its reliance on short-term funding following its rescue. Borrowings due in less than a year declined to 96 billion euros, or about 19 percent of total assets, at the end of the second quarter from as much as 250 billion euros at the end of 2008, according to company filings.

The bank also reduced lending to municipalities as funding dried up. Dexia’s French unit cut municipal lending to 1.26 billion euros in the first half, a 54 percent decrease from the same period a year earlier, according to its semi-annual report. It also stopped lending in Italy after halting loans to municipalities in the U.S, Germany and Britain. In July, the lender passed European regulators’ stress tests saying it didn’t need to raise capital.

As markets froze again during the sovereign crisis, the lender turned to the European Central Bank, using emergency funding proceeds to buy dollars. The lender said on Aug. 4 that central-bank borrowings had doubled to 34 billion euros in the second quarter. Dexia has about 20 billion euros of assets left it could use as collateral to obtain additional loans from the ECB.

Sovereign Debt

Dexia’s largest shareholder following the 2008 rescue was Caisse des Depots with a 17.6 percent stake. Holding Communal, a municipal holding company that was Credit Communal de Belgique SA’s main investor before the 1996 merger, and Arcofin CVBA each own about 14 percent. Belgium’s federal and local governments own about 11 percent in total while the French government owns a

5.7 percent stake directly.

After taking a 377 million-euro pretax writedown on its Greek bond holdings maturing before the end of 2020, Dexia still faced 3.02 billion euros of potential markdowns on its holdings of Greek, Italian, Portuguese, Spanish and Irish government bonds on June 30.

The bank’s holdings of sovereign debt in those five countries total 21 billion euros. That compares with regulatory Tier 1 capital of 14.4 billion euros, equal to 11.4 percent of risk-weighted assets.

Dexia trimmed its bond portfolio, which it was seeking to reduce, to 95.3 billion euros at the end of June from 111.7 billion euros at the end of 2010, according to its website. The bond portfolio includes 7.7 billion euros of non-investment grade notes, mostly to sovereign and public borrowers.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE