Banking: Dexia Agrees to Bailout

Bank's retail section to be nationalised.

Bank’s retail section to be nationalised.

Franco-Belgian Bank Dexia agreed to a rescue plan for its Belgian banking division on Monday.

This means that Belgium will pay 4 billion euros (3.4 billion pounds) to buy Dexia Bank Belgium, the largely retail division of the banking firm.

This move also secures state guarantees for Dexia of up to 90 billion euros, securing borrowing over the coming 10 years. Belgium is set to provide 60.5% of the guarantees, France will take 36.5 percent, and Luxembourg guarantees 3%.

Credit woes

The news came after a board meeting that reportedly lasted 14 hours, going from mid-afternoon on Sunday after France, Belgium, and Luxembourg agreed to a rescue plan.

The governments came together to save Dexia, the first bank to fall from the pressure of the two-year-long eurozone debt crisis. A credit crunch denied it access to wholesale funds, while shares were down 42% in the last week.

While this is a good move for the stability of the banking sector, Moody’s announced the likely prospect that Belgium will receive a hit in its credit ratings as a result of the bailout. This could be devastating to the country, which has a 96.2% debt-to-GDP ratio.

Only Greece and Italy have higher debt ratios in the eurozone. Belgium’s debt is on-part with that of Ireland, which has already received a bailout.

Eurozone pressure

This nationalisation of Dexia could pressure other eurozone governments to prop up their own banking sectors.

The decision for the rescue as France and Germany both agreed that European banks are in great need of recapitalisation, but were locked over differences in their plan. While France wants to use the 440 billion euro European Financial Stability Facility (EFSF) to help French bank recapitalisation, Germany feels EFSF moves should be absolute last resorts.

Dexia will be left with a total of 95.3 billion euros in their portfolio of bonds, including 7.4 billion euros of mortgage-backed securities.

Dexia shares have been suspended since Thursday afternoon, with trading set to resume on Monday after the bank’s press conference.

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