The Brussels-based bank Dexia just agreed to take part in a rescue deal coordinated by the French and Belgian governments, and everyone’s breathing a temporary sigh of relief.The failure of a bank like Dexia suggests that the eurozone crisis is already infecting the stable core of Europe. It also demonstrates that the prospect of contagion within the European banking system is very real and very close at hand.
But first, here are some of the details of the rescue deal (via Reuters):
– The Belgian government will pay $5.4 billion for Dexia’s Bank Belgium. This unit’s 6,000 employees serve 4 million customers depositing more than $108 billion.
– Based on numbers at the end of June, that would leave Dexia with around $130 billion in bonds, of which $10.4 billion are junk bonds and $10.billion are mortgage-backed seurities.
– Dexia will receive $122 billion in guarantees from France and Belgium to secure borrowing for the next 10 years.
To put this in perspective, Dexia’s total credit risk exposure amounts to some $700 billion according to Reuters. That’s more than twice the size of the individual GDPs of Greece, Austria, and Sweden, and about double the individual GDPs of Belgium and Poland. In fact, only five European countries have a GDP that exceeds the bank’s total exposure.
Based on calculations we undertook in July based on the European Banking Authority’s stress test data, Dexia’s exposure to the PIIGS amounts to some $132.95 billion, or 552% of common equity. That’s about the size of Romania’s GDP.
However, Dexia is just the beginning. If the eurozone crisis continues to escalate, we will see more and more banks bow to the pressure of exposure and become unable to borrow money. Next on our list (calculated based on exposure/common equity) would be Commerzbank, BNP Paribas, and Deutsche Bank, all with exposure greater than 325% of GDP.
The Eurosystem simply will not be able to bail itself out without some serious money-printing if it allows banking contagion to spread. The size of banks’ exposure is simply too great to prevent disaster for much longer.