By Rebecca Christie
(Updates with funding requirement in second paragraph.)
Oct. 10 (Bloomberg) -- Belgium agreed to buy the local consumer-lending unit of Dexia SA, ending a 15-year cross-border experiment with France after the European debt crisis deepened.
The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia's troubled assets, Finance Minister Didier Reynders said at a press conference today in Brussels. The sale will cut Dexia's short-term funding requirement by more than 14 billion euros, the French-Belgian bank said in an e-mailed statement.
The dismantling of Dexia, once the world's leading lender to municipalities, became inevitable after concern over European sovereign debt holdings caused its short-term funding to evaporate. Dexia's breakup, three months after it got a clean bill of health in European Union stress tests, brought the region's banking crisis from the continent's periphery to its center.
"Dexia is not an isolated problem," said Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International who rates Dexia "reduce." "The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm."
Accelerated Sales
The company is also in exclusive talks with an international investor and Luxembourg authorities to sell Dexia Banque Internationale a Luxembourg, according to an e-mailed statement from Belgian Prime Minister Yves Leterme's office. A meeting took place yesterday in Brussels with French Prime Minister Francois Fillon, Belgium's Leterme and Reynders, and Luxembourg's Finance Minister Luc Frieden, it said.
"The Ministers are very pleased with the commitment of Dexia to implement a well ordered restructuring plan," according to the statement. "The three governments confirm they will take all the necessary measures to ensure the depositors' and creditors' safety."
The governments will guarantee interbank and bond funding of as much as 90 billion euros for 10 years to Dexia and its Dexia Credit Local unit, with Belgium providing 60.5 percent, France 36.5 percent and Luxembourg 3 percent.
French Operations
Dexia's board has also instructed Chief Executive Officer Pierre Mariani to enter into exclusive negotiations 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, the bank said in its statement. Backing for Dexia Municipal Agency would reduce short-term funding requirements by almost 10 billion euros, the lender said.
Dexia plans to hold a briefing for reporters in Brussels at 9 a.m. local time.
Rescuing Dexia has become critical to preventing 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 1/2 years.
Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe's economic governance.
Alternative Funding
"By the end of the month, we will have responded to the crisis issue and to the vision issue," the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.
Dexia emerged from the 1996 merger of Credit Local de France SA and Credit Communal de Belgique SA, the biggest municipal lenders in their respective countries. Unlike Credit Local, which relied exclusively on wholesale funding for its lending, the Belgian unit also operated a local retail bank.
Over the past decade, the Franco-Belgian bank sought to combine with another retail bank 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.
Bad Bets
"Dexia accumulated the worst errors," said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris, and doesn't own Dexia shares. "They were the experts of municipal lending. By getting late into businesses they weren't able to handle, like securitization and bond insurance in the U.S., they bought all that others didn't want to buy."
Dexia's 18-member board, equally split between France and Belgium, met to review a plan under which the lender 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 CDC, and seek buyers for the remaining units, including Denizbank AS of Turkey and its asset-management division.
The board meeting was the third in less than a month, after ones on Sept. 27 and Oct. 3. Among sticking points for Belgium and France have been which assets to put in the bad bank and what share of borrowings each government should guarantee.
"The situation is more complex than one where you have one bank, one country, one regulator," said Kluis.
'Won't End Well'
Dexia dropped 17 percent in Brussels on Oct. 6 before being suspended, and will resume trading today. The stock fell 42 percent last week on concern that the breakup will leave shareholders with little of value. It has plunged more than 90 percent since a 2008 bailout.
"Once you go on this road, it won't end well for shareholders," Kluis said. "Governments aren't there to save shareholders."
Standard & Poor's on Oct. 6 downgraded the credit ratings on three units, Dexia Credit Local, Dexia Bank and Dexia Banque Internationale a Luxembourg, citing the group's limited access to wholesale funding markets. The ratings are on credit watch with "developing implications," S&P said.
In 2008, after injecting 6 billion euros, France and Belgium gave Dexia guarantees of as much as 150 billion euros. Belgium covered 60.5 percent of the guarantees, France 36.5 percent and Luxembourg 3 percent.
Ratings at Risk
Belgium's Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody's Investors Service because of rising funding risks for euro-area nations with high levels of debt and additional bank support measures that are likely to be needed.
The review will focus on the vulnerabilities of Belgian public debt in the current euro-area sovereign crisis and potential costs and contingent liabilities that the government may incur in supporting Dexia, Moody's said in a statement on Oct. 7. Moody's will also assess how the risks for the growth outlook of the economy and the government's fiscal and economic plans may impact the country's debt trajectory.
For France, the challenge is to rescue a portion of Dexia's operations without endangering its top credit ratings from Moody's and S&P. It's one of six countries in the euro-zone with a AAA rating.
A large chunk of the troubled assets are on the balance sheet of Dexia Credit Local, a French unit. Dexia Credit Local carries most of the bank's 95 billion-euro bond portfolio, which includes 21 billion euros of Greek, Italian, Portuguese, Spanish and Irish sovereign debt. Dexia's municipal lending units in Italy and Spain, which it agreed to dispose of to win European Commission approval for its 2008 bailout, are also on the French unit's balance sheet.
Fire Sale?
"The fair distribution of the burden is a very sensitive and crucial element in the negotiations," Leterme said on RTL radio on Oct. 6. "To save Dexia, we need a fair division of responsibility."
Dexia said on Oct. 6 that an investor is interested in its profitable retail and private banking unit in Luxembourg. Belgian daily L'Echo reported that a Qatari sovereign wealth fund was in discussions to buy the unit, Dexia Banque Internationale a Luxembourg, for 900 million euros, without saying where it got the information.
That announcement set off concern that Dexia's most valuable assets will be sold at fire-sale prices to international buyers in response to a temporary funding squeeze.
Groep Arco, Dexia's second-biggest Belgian shareholder, said on Oct. 6 that it "opposes a forced sale of good units of the group at very low prices to foreign entities."
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, according to a statement on Oct. 6 from a postal union, whose representatives attended a board meeting where the plan was presented. Paris-based La Poste, the parent of Banque Postale, declined to comment, as did CDC and Dexia.
--With assistance from Francois de Beaupuy, Fabio Benedetti- Valentini and Jacqueline Simmons in Paris. Editors: Chitra Somayaji, Matthew Brooker
To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
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