Last updated: November 8, 2012 12:33 pm

Fresh Franco-Belgian bailout for Dexia

A woman strolls past a Dexia Building©Reuters

Bank has adjusted its 2013 accounts

France and Belgium are to bail out Dexia, once the world’s largest municipal lender, for the third time in four years, after agreeing to inject €5.5bn of fresh capital into the debt-stricken bank.

Pierre Moscovici, France’s finance minister, and his Belgian counterpart, Steven Vanackere, decided to recapitalise Dexia as it was incurring heavy losses following the discounted sale of several assets in the aftermath of its bailout. The bank had net losses of €2.4bn in the first nine months of 2012.

“The Belgian and French states have committed themselves to fully subscribe to this capital increase,” said Mr Vanackere. Up to 53 per cent, or €2.9bn, of the bailout will be provided by Belgium and the balance by France. Both will be issued preference shares with voting rights, meaning that any profits generated by the lender would return to the states.

Mr Vanackere said he could not guarantee the latest injection would be the last but hoped that EU authorities would allow Belgium and France to exclude the capital injection from their 3 per cent budget deficit targets. Dexia received €6.4bn in 2008 and was extended financial guarantees in 2011.

Matthias De Wit, analyst at Petercam, said Dexia was “a bit like a black hole” and it was likely it would need further rounds of capital as it continues to have costly liabilities, including a total debt exposure of about €89bn to France, €38.4bn to Italy, €24bn to Spain and €35bn to the US and Canada.

“[Belgium and France] can’t stop funding Dexia because the systemic implications of a disorderly default would be profound,” said Mr De Wit. “Recapitalisation is the only option.”

However, the move is likely to be contentious. It will add further pressure to the public finances of the two countries as both struggle to stem the negative impact of the sovereign debt crisis in the eurozone.

Paris and Brussels have also agreed to readjust the division of guarantees to cover Dexia’s loans and to lower the limit of their exposure from €90bn to €85bn, Mr Vanackere said.

Belgium will cover 51.41 per cent of these guarantees, against 60.5 per cent previously; France will be responsible for 45.59 per cent against the earlier 36.5 per cent. Luxembourg will continue to provide 3 per cent.

The negotiations between Belgium and France over the latest rescue were tense. “It was not easy for us and it was not easy for them. It is a very sensitive situation for both of us for different reasons,” said one French official.

Belgium had been pressing to reduce its share of the guarantees, given the sheer volume of the exposure as a proportion of its gross domestic product. France’s main concern has been over managing the fallout of Dexia’s collapse for its local authority financing, which has been heavily reliant on Dexia’s French municipal finance unit.

The latest capital injection has to be approved by the European Commission.

The Franco-Belgian lender is being dismembered as part of the conditions for its second bailout in October 2011. The sale of its assets contributed to net losses of €11.6bn in 2011 after units were sold at a discount. Dexia sold its Turkish bank DenizBank to Sberbank of Russia in June for about €3bn.

UBS acted as sole financial adviser to Belgium on the €5.5bn recapitalisation and €85bn funding guarantees.

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