Dexia Board Meets as France, Belgium Tussle Over Troubled Assets
Dexia SA’s board meets this weekend to study options to dismantle the French-Belgian bank that has brought Europe’s sovereign debt crisis to the heart of the region’s financial system.
While France and Belgium have rushed to protect their local units, hurdles to an agreement remain as they wrestle over responsibility for assets hit by the crisis that has caused the bank’s short-term funding to evaporate. Dexia’s troubled assets are being folded into a “bad bank” and could amount to as much as 190 billion euros ($256 billion).
Rescuing Dexia — the first victim of the debt crisis at the core of Europe — has become critical to preventing a contagion in the region’s banking industry. Dexia’s balance sheet, with total assets of about 518 billion euros at the end of June, is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland in the last 2 ½ years.
“The governments have to reach a deal this weekend or we’ll see trouble on the interbank market next week,” said Michael Rohr, a banking analyst with Silvia Quandt Research GmbH in Frankfurt. “Investors are looking at which banks have large public finance operations like Dexia.”
Paris- and-Brussels-based Dexia has retail branch networks in two European Union founding nations — Belgium and Luxembourg — and is a former world leader in municipal lending.
The 18-member board, equally split between France and Belgium, may review a plan under which Dexia would set up a bad bank for its troubled assets, hive off its French municipal loan book into a venture with state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for units such as its Belgian bank, Denizbank AS of Turkey and its asset- management division.
The board meeting — today or tomorrow — will be the third in less than a month, after those on Sept. 27 and Oct. 3.
Among sticking points for Belgium and France may be: which assets to put in the bad bank and what share of the lender’s borrowings each government should guarantee.
“The situation is more complex than one where you have one bank, one country, one regulator,” said Cor Kluis, an Utrecht- based analyst at Rabobank International with a “reduce” recommendation on Dexia. “The process will probably take longer than expected and I don’t know if they’ll be able to reach a solution this weekend.”
Dexia dropped 17 percent in Brussels on Oct. 6 before being suspended, and will resume trading on Oct. 10. The stock has fallen 42 percent in the past week on concern that the breakup will leave shareholders with little of value. It has plunged more than 90 percent since the 2008 bailout.
“Once you go on this road, it won’t end well for shareholders,” said Kluis. “Governments aren’t there to save shareholders.”
Standard & Poor’s downgraded the credit rating for three units, Dexia Credit Local, Dexia Bank and Dexia Banque Internationale a Luxembourg, on Oct. 6, citing the group’s limited access to wholesale funding markets. The ratings are on credit watch with “developing implications,” S&P said.