Belgians step in with €4bn to buy key part of troubled Dexia

The Belgian state will buy the national subsidiary of embattled bank Dexia for €4 billion (£3.5bn) and provide tens of billions of euros in new guarantees as part of a wider bail-out of the lender, the first victim of a new squeeze in European credit markets.

The part-nationalisation of Franco-Belgian Dexia, announced yesterday, was triggered by other banks’ increasing reluctance to lend to it due to its exposure to highly indebted eurozone states like Greece and Italy and to struggling municipalities in the United States.

Banks depend on loans to one another for a large part of their daily financing, but can quickly withhold them if they sense there is a danger that a counterpart might collapse and not repay the money. Such fears intensified last week, pushing Dexia, which had a larger dependence on such funding than many of its rivals, to need rescuing from the government.

Belgium’s caretaker prime minister Yves Leterme said the nationalisation was necessary to insulate the Belgian retail bank from the risks of the wider group, Dexia SA. He said support from the state ensures that all of Dexia’s clients “can be sure and certain that their money is in full security”.

On top of the nationalisation, the governments of Belgium, France and Luxembourg together will provide an additional €90bn in funding guarantees for the bank for up to ten years.

Belgium will provide 60.5 per cent of these guarantees, 36.5 per cent will come from France and the remaining 3 per cent from Luxembourg.

At the same time, Dexia’s board is in negotiations with French banks Caisse des Depots et Consignations and La Banque Postale to find a solution to the financing of French local authorities, in which Dexia plays an important role.

Dexia’s shares plunged 33 per cent when they started trading again on the Brussels stock exchange yesterday afternoon, but quickly recovered to rise 2.6 per cent to 87 cents. The shares had been suspended on Thursday afternoon as management and governments were sorting out the bail-out.

Announcement of the bail-out followed marathon negotiations between the three governments and the bank’s management.

Officials were worried that a collapse of the bank would exacerbate an already tight funding environment for banks in Europe, as analysts warn of a credit crunch similar to the one that followed the collapse of Lehman Brothers.

To avert such a scenario, European leaders are now pushing banks to shore up their capital cushions. German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Sunday that they were working on a co-ordinated plan to recapitalise European banks that would be completed by the end of the month. Greece, meanwhile, said yesterday that it had to rescue local lender Proton Bank.

However, many governments across the continent are reluctant to put up more taxpayer money to save the financial sector as they are already facing rising debts.

In the case of Dexia, the Belgian and French governments were concerned that a bail-out would threaten their credit rating and drive up interest rates on their bonds.

On Friday, Moody’s Investors Service placed Belgium’s Aa1 rating on review for a possible downgrade, due in part to the expected expense of guaranteeing that Dexia’s depositors will lose no money.