Europe’s ailing Dexia faces ‘bad bank’ split

Dexia shares have been suspended after  losing 42 per cent of their value [Reuters]

The future of Dexia, the first bank to fall victim to the eurozone sovereign debt crisis, is set to be finalised by the French and Belgian governments.

The Franco-Belgian company was forced to seek government help this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.

Yves Leterme, Belgium’s caretaker prime minister, told a news conference on Saturday evening that final negotiations between France and Belgium would take place in Brussels on Sunday.

Finance minister Didier Reynders said Belgium had been in touch with France, Luxembourg and the European Commission.

“I hope tomorrow we will reach our goals,” Rynders said.

Dexia’s near collapse has stoked investors’ anxieties about the strength of European banks and coincided with growing talk about co-ordinated EU action to recapitalise banks across the continent.

The burden of bailing out Dexia led ratings agency Moody’s to warn Belgium late on Friday that its Aa1 government bond ratings may fall.

Moody’s has already downgraded various banks across Europe, amid fears of an economic downturn and a likelihood of less state support in a future crisis.

Some investors view the response to Dexia’s woes as a test of European governments’ ability to take decisive action to rescue banks if the eurozone debt crisis worsens.

Dexia’s troubled assets

French President Nicolas Sarkozy is due to meet German Chancellor Angela Merkel on Sunday in Berlin to thrash out differences on how to use the eurozone’s financial firepower to address a crisis which analysts say threatens the global economy.

Dexia’s overhaul will see its French municipal financing arm split from the group and merged with French state bank Caisse des Depots and Banque Postale, the post office’s banking arm.

The Belgian government wants to nationalise Dexia’s largely retail banking business in Belgium.

A Dexia “bad bank”, supported by state guarantees will hold $127bn (€95bn) in bonds, including $16bn (€12bn) of sovereign debt of weaker eurozone periphery nations.

The key issues for the French and Belgian governments will be how to divide up the “bad bank” assets, how much Belgium should pay to nationalise Dexia’s Belgian banking business and whether others, such as Belgium’s regions, would be involved in its purchase.

Dexia’s shares have been suspended since Thursday afternoon and have lost 42 per cent since last Friday.