October 5, 2011

In Breakup, Dexia May Cost All Banks

Sale of crippled bank’s units may lead to larger write-downs of Greek debt

Less than three months after Dexia SA, the French-Belgian bank, passed its European Union stress tests, it may be on the block—the chopping block.

Desperately in need of a bailout because of its heavy exposure to peripheral eurozone debt, the bank was already rescued by France and Belgium in 2008. Now those two countries have said they will shore it up once again. But the bailout may have more far-reaching effects this time.

Bloomberg reported that, at a Monday meeting, Dexia’s board met to discuss breaking up the bank after it became unable to obtain continued funding. Its stock has been hammered, along with shares of other banks, over fears that inadequate write-downs of Greek debt, and large holdings of Spanish and Italian bonds, may cause them to fail. Reuters reported that the bank’s toxic assets were expected to be isolated into a “bad bank,” with the rest being nationalized or sold off.

Europe’s banks are paying heavily to insure their debt, with French banks suffering most because of their heavy exposure to eurozone peripheral debt. Dexia at the end of 2010 held over 21 billion euros ($27.95 billion) in Greek, Italian, Spanish and Portuguese bonds, according to a New York Times report.

While a number of banks have already written down their questionable debt holdings to market value, others—including Dexia, Société Generale, BNP Paribas, and a couple of German banks—have not. If they accept lower values on Greek debt, which Germany argues should be written down 50%, they will need to recapitalize even more than banks that have already begun to boost reserves in response to stress tests.

Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels, said in the report, “Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks.” While Dexia may be carrying the heaviest load, he said, “the issue is the same for all banks—it will be the taxpayer that pays for this.”

Simon Maughan, head of sales and distribution at MF Global Ltd. in London, said in the report, “Dexia is by no means alone in terms of being at risk here. There are plenty of other banks out there that have grown their assets way in excess of their deposit base like Dexia. That makes them massively exposed. It feels like the capitulation has started, and people are saying we’ve had enough of this state of affairs and something concrete needs to be done.”

Moody’s Investors Service on Monday put Dexia’s three main units on review for potential downgrade, saying in the report that it was concerned that the bank’s available collateral might be insufficient, “potentially resulting in a further squeeze in its available liquidity reserves.”

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