Belgium Seeks Dexia Consumer Unit as Breakup Nears

By Francois de Beaupuy, Jacqueline Simmons and Fabio Benedetti - Oct 10, 2011 7:43 AM GMT+0700

Dexia SA (DEXB)’s breakup gained momentum as Belgium got approval from France to buy as much as 100 percent of the Belgian consumer-lending unit, three people with knowledge of the talks said.

Belgium’s federal government may pay about 4 billion euros ($5.4 billion) for the division, said one of the people, who declined to be identified because the talks are private. The price was under discussion at a meeting of directors last night, and an agreement may be announced before markets open, the people said. Dexia said it will hold a press briefing in Brussels at 9 a.m. local time following a board meeting.

The dismantling of Dexia, once the world’s leading lender to municipalities, ends a 15-year cross-border experiment that soured during the credit crunch of 2008, when France and Belgium had to rescue the bank, and became untenable in recent weeks as concern over sovereign debt holdings caused its short-term funding to evaporate. Dexia’s breakup, three months after it got a clean bill of health in European Union stress tests, brought Europe’s banking crisis from the continent’s periphery to its center.

“Dexia is not an isolated problem,” said Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International who rates Dexia “reduce.” “The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm.”

Bad Bank

Belgium and France may also have agreed that they will guarantee 60 percent and 40 percent, respectively, of the refinancing of about 120 billion euros of bonds and loans held by Paris- and Brussels-based Dexia, two people said. Proceeds from the sale of Dexia’s profitable units will go to mitigate losses of what will be left of Dexia, which will form a so- called bad bank, two of the people said.

While France and Belgium rushed to protect their local units, they wrestled over responsibility for the troubled assets.

Belgian Prime Minister Yves Leterme and French Prime Minister Francois Fillon, in a joint statement yesterday, said the suggested solution was “the result of intense consultations with all partners involved.” Details weren’t disclosed.

Rescuing Dexia has become critical to preventing contagion in the region’s banking industry. Dexia’s balance sheet, with total assets of about 518 billion euros at the end of June, is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland in the last 2 1/2 years.

Merkel, Sarkozy

Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.

“By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.

Dexia emerged from the 1996 merger of Credit Local de France SA and Credit Communal de Belgique SA, the biggest municipal lenders in their respective countries. Unlike Credit Local, which relied exclusively on wholesale funding for its lending, the Belgian unit also operated a local retail bank.

Wholesale Funding

Over the past decade, the Franco-Belgian bank sought to combine with another retail bank in France and elsewhere in Europe to reduce its reliance on market funding. It failed to merge with Italian lender Sanpaolo IMI SpA in 2004.

“Dexia accumulated the worst errors,” said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris, and doesn’t own Dexia shares. “They were the experts of municipal lending. By getting late into businesses they weren’t able to handle, like securitization and bond insurance in the U.S., they bought all that others didn’t want to buy.”

Dexia’s 18-member board, equally split between France and Belgium, met to review a plan under which the lender would set up a bad bank for its troubled assets, hive off its French municipal loan book into a venture with state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for the remaining units, including Denizbank AS (DENIZ) of Turkey and its asset-management division.

The board meeting was the third in less than a month, after ones on Sept. 27 and Oct. 3. Among sticking points for Belgium and France have been which assets to put in the bad bank and what share of borrowings each government should guarantee.

Multinational Complexity

“The situation is more complex than one where you have one bank, one country, one regulator,” said Kluis.

Dexia dropped 17 percent in Brussels on Oct. 6 before being suspended, and will resume trading today. The stock fell 42 percent last week on concern that the breakup will leave shareholders with little of value. It has plunged more than 90 percent since a 2008 bailout.

“Once you go on this road, it won’t end well for shareholders,” Kluis said. “Governments aren’t there to save shareholders.”

Standard & Poor’s on Oct. 6 downgraded the credit ratings on three units, Dexia Credit Local, Dexia Bank and Dexia Banque Internationale a Luxembourg, citing the group’s limited access to wholesale funding markets. The ratings are on credit watch with “developing implications,” S&P said.

In 2008, after injecting 6 billion euros, France and Belgium gave Dexia guarantees of as much as 150 billion euros. Belgium covered 60.5 percent of the guarantees, France 36.5 percent and Luxembourg 3 percent.

Ratings at Risk

Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s Investors Service because of rising funding risks for euro-area nations with high levels of debt and additional bank support measures that are likely to be needed.

The review will focus on the vulnerabilities of Belgian public debt in the current euro-area sovereign crisis and potential costs and contingent liabilities that the government may incur in supporting Dexia, Moody’s said in a statement on Oct. 7. Moody’s will also assess how the risks for the growth outlook of the economy and the government’s fiscal and economic plans may impact the country’s debt trajectory.

For France, the challenge is to rescue a portion of Dexia’s operations without endangering its top credit ratings from Moody’s and S&P. It’s one of six countries in the euro-zone with a AAA rating.

Fire Sale?

A large chunk of the troubled assets are on the balance sheet of Dexia Credit Local, a French unit. Dexia Credit Local carries most of the bank’s 95 billion-euro bond portfolio, which includes 21 billion euros of Greek, Italian, Portuguese, Spanish and Irish sovereign debt. Dexia’s municipal lending units in Italy and Spain, which it agreed to dispose of to win European Commission approval for its 2008 bailout, are also on the French unit’s balance sheet.

“The fair distribution of the burden is a very sensitive and crucial element in the negotiations,” Leterme said on RTL radio on Oct. 6. “To save Dexia, we need a fair division of responsibility.”

Dexia said on Oct. 6 that an investor is interested in its profitable retail and private banking unit in Luxembourg. Belgian daily L’Echo reported that a Qatari sovereign wealth fund was in discussions to buy the unit, Dexia Banque Internationale a Luxembourg, for 900 million euros, without saying where it got the information.

Opposition to Sale

That announcement set off concern that Dexia’s most valuable assets will be sold at fire-sale prices to international buyers in response to a temporary funding squeeze.

Groep Arco, Dexia’s second-biggest Belgian shareholder, said on Oct. 6 that it “opposes a forced sale of good units of the group at very low prices to foreign entities.”

In France, state-owned CDC and La Banque Postale may join with Dexia to create a new company to take over the French municipal lending arm, according to a statement on Oct. 6 from a postal union, whose representatives attended a board meeting where the plan was presented. Paris-based La Poste, the parent of Banque Postale, declined to comment, as did CDC and Dexia.

To contact the reporters on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net