Everything You Need To Know About Dexia, The Belgian Bank That Everyone Is Freaking Out About

swimming nose holding underwater

Photo: tombooth via Flickr

Dexia looks could be the first casualty of the eurozone crisis.The French and Belgian governments are deciding how best to protect the Brussels-based bank from collapse. They appear to be considering two different ideas:

– A new bailout with massive capital injections from both governments. Some French experts worry this could put France’s AAA rating at risk

– Splitting up the bank. French state-owned La Banque Postale and Caisse des Depots et Consignations would buy Dexia’s municipal lending unit, and Belgium would assume its assets. Dexia would thus become a “bad bank.”

How did Dexia get this far underwater?

Dexia first came under fire in September 2008, when it was forced to ask for a bailout.

Dexia's creditors feared the financial institution's exposures to U.S. Financial Security Assurance Holdings Ltd. and German bank Depfa.

It applied to Belgium, France, and Luxembourg for a bailout and got an $8.5 billion capital injection. Then in November 2008, it got $200 billion in state guarantees.

The Federal Reserve also lent huge amounts of money to the bank in order to stave off muni bond disaster during the last financial crisis.

Source: Reuters

The bank reported that it had lost about $4.4 billion in 2008.

But it then proceeded to report a profit in the first quarter. It then ruled out the possibility of breaking itself up, and later tossed aside any merger intentions.

Luxembourg, French, and Belgian governments renewed guarantees, but lowered the amount they would provide to around $130 billion.

Source: Reuters

rumours surface about mergers.

Investors started speculating about a merger between Societe Generale in late 2009. A year later, they started talking about cooperation with the French Banque Postale.

Source: Reuters

Dexia sold off assets and attempted to reign in its balance sheet.

Shooting for a balance sheet reduction of 35% by 2014, the bank attempted to sell off operations in Slovakia, Spain, and Italy.

The bank also embarked upon plans to increase exposure to the retail banking sector.

Source: Reuters

But Dexia has seen massive losses.

Dexia's share price fell 39% of the course of 2010.

In 2011, Dexia sold lots of toxic assets and agreed to participate in the Greek bond swap. It has been forced to write off huge portions of its assets, and reported losses of $5.7 billion after Q2.

Source: Reuters

Dexia has agreed to finance many municipalities' loans, in the U.S. and abroad.

It used to provide cheap financing to municipal and national governments. It has been forced to increase the interest rate it charges debtors to 12% recently and accelerate the terms of their loan maturity.

Source: WSJ

Moody's has already downgraded Dexia's debt. Now the bank itself is on review.

Moody's downgraded long-term and senior debt ratings of three of Dexia's main businesses in July. Its board held an emergency meeting Monday after Moody's threatened a full downgrade of the bank from its Aa3 rating.

Dexia has also been virtually cut off from interbank markets.

Belgian and French authorities announced Tuesday that they would step in to protect the bank.

France and particularly Belgium would be hard hit in the event of a Dexia collapse, and say they won't let this happen.

However, there are doubts that they can actually make good on this promise, as Dexia's total assets are more than 150% of Belgian GDP.

Now speculation abounds that bailing out Dexia could harm France's credit rating.

Former French PM Laurent Fabius said France was was 'caught by the throat,' since bailing out the bank could jeopardize its AAA rating.

French officials quickly denied that such an action would damage France's credit rating. 'The Belgian and French states will put much less money into this operation than the British put into the Royal Bank of Scotland or Barclays,' concurred France's central banker Christian Noyer.

Source: AFP

France and Belgium might also split up the bank to avoid having to inject capital.

France reportedly favours a plan to split up the bank.

Under this plan, Belgium would assume its assets and France would buy its municipal lending unit. Dexia would then be left as a 'bad bank.' Its 'bad' assets -- guaranteed by French and Belgian governments -- would then be transferred to a new company.

Source: Bloomberg

French banking entities are slated to announce plans for the bank tomorrow.

French state-run investment fund Caisse de Depots and postal bank Banque Postale will announce a decision on how to secure the bank tomorrow, according to French Finance Minister Francois Baroin.

Everyone's worrying this banking stress might lead to contagion among France's other fragile banks, and then spread throughout the European banking sector.

Source: AFP

Who will be the next casualty of the eurozone debacle?

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