Dexia SA, the French-Belgian lender that’s being broken up, faces a European Union investigation into as much as 45 billion euros ($59 billion) in guarantees from Belgium, France and Luxembourg.
The European Commission gave temporary approval for the guarantees and said final authorization would be based on a restructuring plan that the governments must submit within three months, the Brussels-based commission said in a statement today.
The temporary guarantees for Dexia and its unit Dexia Credit Local “mark a significant change compared with” EU conditions for a 2008 bailout, the regulator said. Belgium’s credit rating was cut two steps by Moody’s Investors Service last week, which said rising borrowing costs, slowing growth and liabilities from Dexia’s breakup threaten to inflate the euro area’s fifth-highest debt load.
“The restructuring plan enabled Dexia SA to enhance the stability of its financing sources and reduce its leverage and its portfolio of non-strategic assets,” the commission said. “The bank has fallen behind with the implementation of this plan and the imbalance in its financing sources has worsened again since last summer.”
The EU approval means Dexia can use the guarantees to raise funding from Dec. 22, the bank said in an e-mailed statement. “The implementation of the guarantee will enable the Dexia Group to reduce the amount of its central bank refinancing and, gradually, the financing” for Dexia Bank Belgium which was taken over by the Belgian government in October.
May 31 Expiration
The guarantees will cover loans with maturities of as much as three years and will expire on May 31 unless the EU and the three governments agree to an extension, Dexia said. The bank will pay a commitment fee of 225 million euros and monthly fees to Belgium, France and Luxembourg based on EU guidelines that shield banks from soaring insurance costs on sovereign debt.
Dexia, rescued by the governments in October for the second time in three years, obtained as much as 45 billion euros in guarantees from the three states to cover its financing needs until the end of May, the Paris- and Brussels-based bank said on Dec. 5. The bank yesterday sealed a deal to sell its Luxembourg unit, Dexia Banque Internationale à Luxembourg SA, for a total of 730 million euros to Precision Capital of Qatar.
The temporary guarantee is “the first step” from the three governments to provide as much as 90 billion euros, Dexia said earlier this month. Belgium is taking on 60.5 percent, France 36.5 percent and Luxembourg 3 percent.
The bank will likely have to prepare extra restructuring measures to show how it plans to compensate for harm to competition caused by the state aid before it can win final EU approval for the rescue. Dexia is planning to “radically shrink in size” and won’t have to comply with capital rules set by the European Banking Authority, it said in a Dec. 8 statement.
Dexia, once the world’s largest municipal lender, said Nov. 9 its shareholder equity shrank 84 percent after the nationalization of its Belgian bank unit and declines in the value of government-bond holdings.
Belgian borrowing costs started surging after a caretaker government bought Dexia’s Belgian banking unit for 4 billion euros and agreed to guarantee as much as 54.5 billion euros of the crisis-hit lender’s liabilities for as long as 10 years.