France-Belgium Dexia SA rescue

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Belgian government has agreed to support the division of Dexia SA as a part of the bank’s bailout plan. Dexia has been in troubled waters ever since Europes debt crisis deepened. The need to recapitalise banks is emerging as another strain for European governments whose budgets are already stretched.

Dexia agreement was reached on Tuesday between France and Belgium, with the latter agreeing to preserve the consumer-lending unit and the municipal lending unit in France.

The Belgian federal government will also pay 4 billion euros ($5.4 billion) for the division and guarantee 61% of the bad bank to be set up for Dexias troubled assets, while France and Luxembourg will provide 37% and 3% respectively as backing.

TROUBLED ASSETS

Dexias troubled assets are on the balance sheet of Dexia Credit Local, which carries most of the banks 95 billion-euro bond portfolio, including its 21 billion euros of Greek, Italian, Portuguese, Spanish and Irish sovereign debt. Dexias municipal lending units in Italy andSpain are also on the French units balance sheet.

Dexia will sell assets, including its Luxembourg unit and its French municipal lending arm, to provide the bad bank capital to contain future losses. The Belgian sale will cut Dexias short-term funding needs by more than 14 billion euros. Selling Dexia Municipal Agency would reduce short-term funding requirements by almost 10 billion euros. Further asset sales are also likely, which includes Dexias fund-management division.

The division of Dexia, one of the worlds leading lenders to municipalities, became unavoidable after its short-term funding was stopped over concerns related to European sovereign debt holdings. Dexias bailout, three months after it passed European Union regulators stress tests, brings the regions banking crisis to its center.

Belgian Prime Ministers office confirmed that the three governments would take all the necessary measures to ensure the depositors and creditors safety.

Cor Kluis, a Netherlands-based analyst at Rabobank International said Dexia is not an isolated problem.

The stocks resumed trading after the suspension since October 6. Dexia stocks fell as much as 36 points in Brussels.

Meanwhile, Dexia is in talks to sell Dexia Banque Internationale to a group backed by Qatari royal family, while the government of Luxembourg will take a minority stake. The unit is valued at about 1.7 billion euros, according to KBWs Lambert.

Dexias 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.

Dexia SA was the result of a merger of Credit Local de France SA and Credit Communal de Belgique SA. 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.

Francois Chaulet said, Dexia accumulated the worst errors. He said, They were the experts of municipal lending. By getting late into businesses they were not able to handle securitization and bond insurance in the U.S. and they bought all that others did not want to buy.

Dexias 18-member board, which is equally split between France and Belgium, met to review the breakup plan on Tuesday. The discussion was regarding the assets and sharing of borrowings each government should guarantee. The two governments differ on a number of issues. One subject of dispute is the fate of Dexias retail unit in Belgium. However, the Belgian government reassured its retail customers that deposits are safe. Both the countries have a direct 5.7% interests in the bank.

RATINGS

Standard & Poors had downgraded the credit ratings of Dexias three units, Dexia Credit Local, Dexia Bank, and Dexia Banque Internationale a Luxembourg, citing the groups limited access to wholesale funding markets. Moodys Investors Service had also placed Belgiums Aa1 local- and foreign-currency ratings under review on Oct. 7, citing rising funding risks for nations with high levels of debt and the cost of additional support measures for banks including Dexia. The Dexia debt guarantee equals about 15% of the countrys gross domestic product, and 2% of Frances. Moodys stated that Dexias bailouthas little impact on France.

KBC Grope NV

KBC Grope NV, Belgiums biggest bank, agreed to sell its private banking unit to Qatari-backed Precision Capital for 1.05 billion euros. The sale will increase KBCs capital by about 700 million euros according to the bank.

EUROPEAN BANKS

German Chancellor Merkel and French President Sarkozy have together pledged to resolve the crisis of Europes banks. Sarkozy said they would deliver a plan during the Group-of-20 meeting in Cannes, France on Nov. 3.

The two leaders have yet to detail how the bailout fund would be used to help European banks. The regions banks may need anywhere between 100 billion euros and 200 billion euros of capital through a European-wide program similar to the U.S.s Troubled Asset Relief Program, according to estimates released by several analysts. European governments are also facing growing pressure on their credit ratings as the regions economy slows and the cost of bailing out banks increases.

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.

Sources: Bloomberg, Business week, Reuters

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