The Belgian government has agreed to buy the local lending unit of Dexia for €4 billion ($5.4 billion) as part of a wider rescue package for the struggling Franco-Belgian bank. The bailout plan comes after an earlier rescue package for the bank during the financial crisis and includes plans for a €90 billion ($121 billion) guarantee for the next 10 years.
Belgium will put up 60.5% of the funds and France 36.5%, with Luxembourg providing the remaining 3%. Belgian Prime Minister Yves Leterme said these steps were necessary to protect the local retail arm and to reassure Dexia’s shareholders that that their money was fully secured.
Dexia is the first major European lender to fall victim to the sovereign debt crisis in the Euro zone. It comes as a result of international lenders withholding loans due to fears the Franco-Belgian bank might default on repayments due to its exposure to Greece and other indebted euro zone states.
Following the suspension of trading last week, Dexia shares resumed trading on Monday, dropping 4.7% at the close of trading.
Credit Rating Under Review
The bailout plan will help stabilize the lender’s access to funding markets, but there may be consequences for Belgian and French government credit ratings. International ratings agency Moody’s said it was placing Belgium’s Aa1 rating under downgrade review because of the added pressure the 10-year protection plan would put on the state’s finances.
Dexia said the part nationalization of its Belgian arm would help improve its balance sheet by €55 billion, as well as reducing its immediate funding requirements by around €14 billion.
Discussions are also underway in France with local banks La Banque Postale and Caisse des Depots et Consignations to take on the lending portfolio Dexia has with French authorities, which could cut a further €10 billion from funding requirements.
The bank’s French arm has one of the largest portfolios for municipal and public sector loans in the country.
Yesterday, Dexia’s board of directors announced it had accepted the bailout proposition from the Belgian, French and Luxembourg governments.
CEO Pierre Mariani defended the bank’s management, saying its recent efforts to reduce the balance sheet had averted an even bigger rescue plan. “We never had a problem of solvency but one of liquidity given our large portfolio of sovereign debt," Mariani added.
Key Statistics – Belgium’s Economy (source: Belgian public agency Federal Planning Bureau)
- The Belgian economy is expected to slow to 1.6% in 2012, compared to growth figures of 2.4% in 2011.
- Inflation is expected to fall to around 2%, with wage indexation expected to rise above this level, increasing by 1.9% in 2012 compared with 1.2% the previous year.
- In 2011, net employment creation is estimated at 54,200 jobs, with 2012 forecasts predicting a drop to about 30,000 jobs.