Goverments guarantee Dexia to bolster rescue

By Antonia Van de Velde and Philip Blenkinsop

BRUSSELS, Oct 9 (Reuters) - France, Belgium and Luxembourg will guarantee new financing by Dexia in an attempt to bolster an earlier rescue bid and restore confidence in the banking group.

Belgian Prime Minister Yves Leterme said on Thursday after marathon talks on the bank's future that such a system of guarantees could also be provided to all of the country's banks under the same conditions.

France said that the Dexia measures were not required for French banks.

Dexia shares on Euronext rose 18 percent to 5.90 euros in early trade after the deal was announced, while the DJ STOXX European bank index was up just over 2 percent.

The overnight talks came after shares in the cross-border municipal lender and retail bank continued to dive despite an earlier 6.4 billion euro ($8.72 billion) rescue by the three governments and public bodies.

"This was fundamental to restoring confidence after a sharp drop in the share price," Dexia Chief Executive Pierre Mariani told a news conference of the new measures, which will last to Oct. 31 next year and could be extended by another year.

Dexia's situation is complicated by the fact that it is largely in the hands of public bodies, including Belgium's three regions and local authorities, who signed up for last week's capital injection at 9.90 euros per share.

A source close to the talks said Belgium would provide 60.5 percent of the guarantee, France 36.5 percent and Luxembourg 3 percent.

"It is a carefully considered risk," Leterme told the joint news conference, stressing that the package, while acknowledging some risk to state finances, did not necessarily bring a huge cost burden with it.

Asked if the model could be extended to France, Economy Minister Christine Lagarde said such measures were not needed.

No immediate solution was found for Dexia's loss-making U.S. bond insurance unit FSA.

"That's not something you can improvise on in one night or even two days. We can continue to work on it," said Dexia Chairman Jean-Luc Dehaene, a former Belgian premier.

But Mariani played down the risk of FSA's core activities, adding: "The activities are far from toxic. We have no particular concern on this."

Dexia had lost half of its market value in the last two weeks, including a 15.4 percent drop on Wednesday after credit rating agency Standard & Poor's downgraded Dexia's core entities on Tuesday for the second time in a week. It also said it may cut FSA's triple-A rating.

Leterme urged depositors on Tuesday not to withdraw funds from Dexia, vowing the government would stand by the bank.

"We will take responsibility, as we did in the case of Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz). Above all, I have to say people should remain calm. There is absolutely no reason to withdraw deposits. Dexia is a healthy bank," the prime minister said.

Belgian Finance Minister Didier Reynders said Belgium was likely to raise its raise deposit guarantees to 100,000 euros ($135,900) from 20,000 euros now. (Reporting by Michele Sinner, Writing by Mark John and Paul Taylor; Editing by Erica Billingham)