Belgium Nationalizes Part of Troubled Bank Dexia

Government buys local consumer lending unit

Belgian-French bank Dexia is splitting up after the Belgian government announced Monday that it would buy the local consumer lending unit of the company, leaving its Luxembourg unit and French municipal lending division, among other assets, to be sold off to raise capital for a so-called bad bank.

Belgium will guarantee 60% of that bad bank, according to Didier Reynders, Belgium’s finance minister, which will be used to sequester Dexia’s troubled assets. Members of the Qatar royal family are reportedly interested in the purchase of the Luxembourg unit.

Bloomberg reported that the deal will cost 4 billion euros ($5.4 billion), with the governments of Belgium, France and Luxembourg guaranteeing funding to keep Dexia afloat. Together they will guarantee about 90 billion euros over the next ten years, with Belgium providing 61%, France 37% and Luxembourg 3% of the necessary funds. Dexia’s fall was an unpleasant surprise for the euro zone, because it had passed its stress tests in July with flying colors, yet was mired in peripheral zone debt and severely undercapitalized.

A joint Sunday meeting in Brussels among Belgian Prime Minister Yves Leterme, French Prime Minister Francois Fillon and Luxembourg’s Finance Minister Luc Frieden resulted in a joint statement that said, “The three governments confirm they will take all the necessary measures to ensure the depositors’ and creditors’ safety.”

It remains to be seen how well that will work out, however. Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International who rates Dexia “reduce,” was quoted in the report saying, “Dexia is not an isolated problem. 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.”

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