Is Dexia rescue the first of many for Europe

10th October 2011

But the move has investors and markets asking two big questions – first will it see Belgium come under pressure from rating agencies and bond markets exacerbating the sovereign debt crisis? Second, given that Dexia passed its European stress test only a few months ago, will this simply be the first of many heralding a repeat of the 2008 banking crisis?

Reuters says that shareholders will receive euro 4bn from the Belgium government to buy Dexia Bank Belgium. It will also receive euro 90bn of guarantees with 60.5 per cent from Belgium, 36.5 per cent from France, and 3 per cent from Luxembourg.

The euro 95.3bn bond portfolio including 7.7bn euros worth of  junk class bonds will be placed in run-off arrangement, effectively creating a ‘bad bank'. Luxembourg has plans to take a minority stake in the bank in its territory with the Qatari royal family taking the majority as Bloomberg reports here.

The French stated owned Caisse des Depots et Consignations and Banque Postale – the banking arm of French post office – will buy Dexia's business which lends to French municipalities. Some of these bonds have proved controversial due to their terms and there is speculation that some French towns will not be able to pay the bonds back in full.

The Telegraph surveys analysts' reactions here. It quotes Cor Kluis, an analyst at Rabobank International saying: "Dexia is not an isolated problem. 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."

Mindful Money economist Shaun Richards gives a cynical take on events over the weekend from initial reassurances to rescue and future pain for taxpayers.

Ratings agency Moody's warned even before the deal that a rescue would see Belgium's rating come under review.

Zero Hedge's Tyler Durden considers the issue here – balancing growing fears about Belgium's debt with other more positive factors.

He writes: "Moody's review will evaluate the weight of these growing risks in light of the country's high rating but also relative to the country's strong credit features such as the economy's net creditor status, high savings rate and the absence of substantial structural imbalances."

On Seeking Alpha stand up comedian and private investor Vince Martin is convinced Dexia is the first of many and makes much of Dexia's stress test pass.

He writes: "The fact that Dexia passed European Banking Authority stress tests just three months ago now casts a cloud over the entire European banking community, destroying confidence, and increasing the possibility of another bank run. Arguing that Dexia is somehow an isolated case is delusional."

It is not just stand up comedians with an investment interest that are worried about re-run of 2008. The Economist is worried that rescues will continue on a case by case basis which will not resolve the crisis overall.

It says: "A fragmented, nation-by-nation approach to recapitalisation will not work this time, however. France and Belgium may be able to stand behind Dexia but supporting entire banking systems is beyond the capacity of many sovereigns. The European Financial Stability Facility (EFSF), the euro zone's bail-out fund, must carry out simultaneous injections of capital into the region's banks as soon as it can. Central banks must get into full fire-fighting mode, too. In particular, that means offers of unlimited two-year liquidity from the ECB, which was due to meet after The Economist went to press."

More from Mindful Money:

Capitulation: Are we there yet?

Twelve UK banks downgraded by Moody's over prospect of less state help

David Cameron warns of eurozone break up without decisive action

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