Dexia Cost French Taxpayers 6.6 Billion Euros, Auditor Says

Dexia SA, the bank being wound down after two bailouts, has cost French taxpayers 6.6 billion euros ($8.7 billion), the national auditor said.

“High risks will still persist for a long time,” Didier Migaud, who heads the audit body, known as the Cour des Comptes, said at a Paris press briefing today. Dexia’s break-up scenario supposes “a rapid crisis exit,” and a new recapitalization from the governments can’t be ruled out, he said.

Capital writedowns net of income from a state guarantee amount to 2.7 billion euros for the French government, while Caisse Des Depots et Consignations, the state-owned bank that was the biggest French investor in Dexia in 2008, lost about 3.9 billion euros, according to a report published today. The auditor didn’t calculate Dexia’s losses for Belgian taxpayers.

Dexia, once the world’s largest lender to local governments, has been dismantled after receiving two bailouts over the past five years. France and Belgium, which wrestled for more than a year over a second rescue, in December injected 5.5 billion euros in the bank through preferred shares and lowered the cost of its government funding guarantees.

Dexia was initially bailed out in 2008 after it ran out of short-term funding. In 2011, it became the sovereign-debt crisis’s first casualty in the core of Europe. Dexia had a 2.87 billion-euro net loss in 2012 as it sold most of its remaining lending units and funding costs exceeded interest income.

Second Rescue

While the second taxpayer-funded rescue almost wiped out shareholders, it was aimed at enabling Chief Executive Officer Karel De Boeck to restore market confidence in Dexia’s ability to honor its debt, reduce borrowing costs and minimize losses in winding down a company that European Union Competition Commissioner Joaquin Almunia called “the largest bad bank in the EU.”

Dexia, which plans to carry most of its residual assets to maturity, won’t be profitable before 2018, De Boeck told Belgian lawmakers in November. Its core Tier 1 capital ratio improved to

19.7 percent because of the bailout funds, up from 8.5 percent on Sept. 30.

That safety margin is less comfortable than it may look because Basel III capital rules would inflate risk-weighted assets by about 16 billion euros from the 55.3 billion euros reported under current rules at the end of last year, De Boeck said in Brussels in February as the company announced annual results. He forecast a loss of about 950 million euros this year.

Sovereign Debt

The European Commission in December authorized the “orderly resolution” of the Dexia group, the sale of its refinancing unit for French local authorities, known as Dexia Municipal Agency, and the restructuring of Belfius Bank NV, the Belgian consumer-banking unit acquired by Belgium in 2011.

Dexia also remains exposed to Europe’s sovereign debt, with a maximum credit risk of almost 61 billion euros in Italy and Spain, or about 5.5 times the bank’s Tier 1 capital as of Dec. 31, the bank has said. About 9 percent of its 66 billion-euro residual bond portfolio is rated non-investment grade.

The French auditor pointed to 10.5 billion euros of structured “sensitive” debt to French local governments as an “important risk” in winding down what remains of Dexia. The French structured municipal-debt portfolio has now mostly been transferred to SFIL, a newly created state-owned municipal lender.

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