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Belgium, France Give Dexia $7 Billion, Charge Less for Guarantee

Belgium and France, wrestling for more than a year over the second rescue of Dexia SA, agreed on a 5.5 billion-euro ($7 billion) recapitalization of the bank and will charge the bank less for its government funding backstops.

Belgium will buy about 2.92 billion euros of preferred shares with dividend priority over common stock and France will cover the remaining 47 percent, the Belgian and French finance ministries said today in separate statements. The two states will hold 92 percent to 93 percent of Dexia’s voting rights and don’t plan to buy the remaining shares, Dexia Chief Executive Officer Karel De Boeck told reporters in Brussels.

Dexia, which was rescued with taxpayer funds a first time in 2008, last year became the first casualty of the sovereign-debt crisis at the core of Europe. While France and Belgium rushed to protect their local units last year, hurdles to an agreement remained as they tussled over responsibility for assets hit by the fiscal turmoil that caused the bank’s short-term funding to evaporate.

“You’ve got to absorb losses,” said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris and doesn’t own Dexia shares. “Still, you could hardly say that Dexia’s difficulties, its issues with municipalities, are any closer to being over.”

Today’s agreement also involves a reduction in the commission Dexia pays for as much as 85 billion euros of state guarantees. The bank will pay a monthly fee on outstanding government-backed debt at an annual rate of 5 basis points, down from 90 basis points on temporary guarantees of as much as 55 billion euros.

Commitment Fee

Belgium’s share of the backstops will drop to 51.4 percent from 60.5 percent currently, while France will back 45.6 percent of the guarantees, up from 36.5 percent, according to the statements from the two finance ministries. Luxembourg guarantees the remaining 3 percent. Belgium will also receive the remaining 79.5 million euros of the commitment fee Dexia had to pay for its temporary guarantees.

Dexia has tapped about 73.8 billion euros of the state guarantees, including backstops from a 2008 agreement, according to data compiled by the Belgian central bank. The bank was still clinging to 8.2 billion euros of emergency central-bank loans on Oct. 30 even as an increase in benchmark long-term interest rates freed up 1.3 billion euros of collateral posted to counterparties in derivative contracts during the third quarter, Dexia said in a statement.

Finally, Dexia said today it won’t have to provide a guarantee covering potential losses on 9.4 billion euros of structured loans with French municipalities that are on Dexia Municipal Agency’s balance sheet.

Equity Wiped Out

The planned sale of Dexia Municipal Agency, including its structured loans, to a new French municipal lender to be set up by the French state, Caisse des Depots et Consignations and La Banque Postale would reduce Dexia’s borrowing requirements by 12.5 billion euros.

Dexia said it needed additional capital after its statutory equity was wiped out following a “significant” writedown of the carrying value of its French unit Dexia Credit Local.

The bank, which reported a 1.23 billion-euro net loss for the third quarter, plans to transfer the funds received to Dexia Credit Local “in order to increase the core equity in accordance with French accounting and prudential standards,” according to the statement.

Belgian Debt

Dexia’s consolidated core Tier 1 ratio improved to 8.5 percent on Sept. 30 from 6.2 percent at the end of June as risk-weighted assets fell 25 percent to 65.6 billion euros following the sale of Denizbank AS and the 50 percent stake in RBC Dexia Investor Services.

Belgium doesn’t plan any additional debt sales to finance its share of the recapitalization, Jean Deboutte, director of strategy and risk management at the Belgian debt agency, said by telephone. Deboutte said Belgium has already raised more money from bond sales than actually planned and will proceed with its regularly scheduled bond auction on Nov. 26, the last one of the year.

While the Dexia injection will inflate Belgium’s public debt, it won’t have a negative effect on the budget deficit, Belgian Finance Minister Steven Vanackere told reporters in Brussels.

The governments anticipate the recapitalization deal, which needs approval of Dexia shareholders and European Union regulators, will be concluded by the end of the year. Dexia shareholders may meet on Dec. 21 to approve the government transaction, De Boeck told reporters.

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