Belgium’s nationalization of the domestic operations of Dexia was formally agreed in the early hours of Monday by the bank’s board of directors and the Belgian government, along with state guarantees worth €90-billion ($120-billion U.S.) to finance the rest of the group.
Brussels will pay €4-billion to take over Dexia Bank Belgium, which includes a large retail bank in a group which is otherwise focused on lending to local governments. The forced divestment is the first step in the dismembering of the Franco-Belgian bank after it fell victim to a liquidity squeeze prompted by the euro zone debt crisis.
Dexia’s management was further instructed by its board to start negotiations to pair its French municipal loans business with the Banque Postale, a bank tied to the postal system in France, and the Caisse des Dépôts et Consignations, the French sovereign wealth fund that owns stakes in both Postale and Dexia.
France, Belgium and Luxembourg will jointly underwrite Dexia’s financing needs up to €90-billion for 10 years, in a repeat of 2008 when the three governments stepped in with €150-billion of guarantees to tide over Dexia after it ran into financing difficulties.
Belgium will provide 60.5 per cent of the guarantee, or €54-billion, with France up for 36.5 per cent and Luxembourg 3 per cent, it was agreed after discussions between the French and Belgian prime ministers on Sunday.
Shares in the bank whipsawed when they resumed trading on Monday afternoon, falling 36 per cent at one stage before settling 6 per cent higher at €0.90 in Brussels.
The bail-out negotiations were made more complicated by fears on Belgium and France’s side about the impact that new liabilities contracted to save the bank could have on their public finances.
The French government is said to be concerned about how the Dexia lifeline could affect the country’s triple-A credit rating, which allows it to borrow cheaply on international markets and gives it added clout in euro zone bail-out negotiations.
Standard & Poor’s credit rating agency on Monday confirmed the sovereign debt ratings of Belgium and France after details of the rescue plan were announced.
The agreement pushes Belgium’s net debt to gross domestic product ratio up by 1 percentage point to 97.2 per cent.
Belgium on Friday was placed on a negative ratings watch by Moody’s, which cited the banking situation as one factor for a possible future downgrade. The spread of Belgian 10-year bonds compared with benchmark German paper, a key indicator of perceived risk, stands at slightly less than 2 per cent, up from 1 per cent at the start of the year.
The government guarantees will help finance what remains of Dexia after the Belgian and French spin-offs, which are expected to be followed by other divestments including Dexia’s stake in DenizBank, a Turkish lender, and its asset management business. Talks to sell the Luxembourg unit to a consortium led by the Qatari sovereign wealth fund are under way.
The remaining “bad bank” will consist mainly of a bond portfolio worth around €100bn, which requires financing which has weighed down Dexia’s balance sheet since the 2008 bail-out.
Jean-Luc Dehaene, the former Belgian prime minister who has chaired Dexia since 2008, blamed “a crisis within a crisis” for the lender’s woes. “Had it not been for this external factor [the euro zone crisis] we would have managed,” he said at a press conference Monday morning.
Along with Pierre Mariani, current chief executive, he blamed the pre-2008 management for saddling Dexia with short-term debt. “Those who created this situation should examine their own consciences.”
Belgium’s actions echo the downfall of Fortis, which in 2008 was rapidly nationalized before being sold off to BNP Paribas.
“We are happy to have been able to free Dexia Bank Belgium of any links and any risk that might have come from its holding by Dexia SA [the listed entity]” said Didier Reynders, Belgian finance minister.
None of the problematic bonds that will stay in the “bad bank” structure were acquired after October 2008, the bank said. The vehicle will remain listed – using Dexia’s existing holding structure – until further notice, said Mr. Mariani.
The staff of the head office will be offered jobs by the local subsidiaries being spun off.
Dexia’s reliance on short-term funding from markets is ultimately the reason why it was forced to ask for state aid last week. Dexia before 2008 moved aggressively to finance its long-term loans by raising short-term money from wholesale markets, instead of attracting consumer deposits, as is more conventional for banks.
The new management, brought in after the 2008 bail-out, moved to cut the amount of short-term funding required, which has been cut from €260-billion to just under €100-billion. However, even that proved to be too much after markets seized up during the summer because of the euro zone crisis.
The European Commission, which acts as the European Union’s antitrust enforcer, said it would review the deal to ensure it was in line with EU rules on state aid.
KBC, the Belgian banking group, accepted a €1-billion offer for its Luxembourg-based private banking arm, KBL. Precision Capital, a Qatari-backed fund, is the second potential suitor for KBL after a 2010 planned sale to India’s Hinduja Group fell through because of regulatory concerns.
The price is lower than the €1.35-billion price tag to Hinduja, partly due to faltering market conditions but also hit by earlier capital releases. KBC said it would receive a €700m capital boost. KBL has assets under management of €47-billion.