10/06/2011 06:35 EDT | Updated 12/06/2011 05:12 EST

Troubled Dexia in negotiations to sell off Luxembourg affiliate; Luxembourg govt to take stake

PARIS - Dexia is in negotiations to sell off its Luxembourg affiliate to a group of international investors and the Luxembourg government, the troubled Franco-Belgian bank said Thursday, in what is likely to be the first step in a massive rescue and restructuring.

That announcement did not stem the flight from the bank's shares, which fell another 14 per cent in trading in Brussels. Bar a modest rally on Wednesday, Dexia's share price has been under massive pressure this week and its woes have rekindled fears of a banking crisis similar to the one that gripped financial markets in the autumn of 2008 in the aftermath of the collapse of Lehman Brothers.

Dexia SA is highly exposed to the debts of some of Europe's more indebted countries, including Greece and Italy. Fears that those countries could default are making other banks wary of lending to Dexia, which as a result is finding it increasingly difficult to fund its day-to-day operations.

Its problems came to a head this week as investors dumped its shares — driving its stock price down 40 per cent at one point — amid speculation it would go bankrupt. In response, the French and Belgian governments both guaranteed its financing and deposits.

But the flight from its shares continued, and French Finance Minister Francois Baroin said Wednesday that the bank could not continue in its present state. The company announced that its board will meet Saturday to discuss those options.

But the first piece of the restructuring came Thursday from Luxembourg, where Dexia Banque Internationale a Luxembourg is based.

Dexia said it was in exclusive discussions with a group of international investors to sell the Luxembourg affiliate and that the Luxembourg government would play a role.

The government confirmed that it was ready to take a minority stake in the bank.

Dexia said the board would make a decision on the offer at the end of an exclusive period, the length of which is did not specify. But a statement from the Luxembourg government said negotiations were at an advanced stage.

This is not Dexia's first rescue. In the aftermath of the collapse of Lehman Brothers in late 2008, Dexia got a government and shareholder bailout when it ran into trouble with its U.S. bond insurance unit.

As part of that deal, Belgium, France and Luxembourg said they would inject almost 6.4 billion euros ($8.5 billion) to keep it afloat.

The bailout led to Dexia's being owned 17.6 per cent by France's sovereign wealth fund, the Caisse des Depots et Consignations. The French and Belgian governments each own another 5.7 per cent of the bank, and three Belgian regional authorities jointly hold another 5.7 per cent stake.

Since then, Dexia has worked to shore up its finances and reduce its exposure to risky debt, but apparently not fast enough for markets. Renewed concerns about bank financing and debt exposure thrust Dexia back into the spotlight this week after Moody's warned it could downgrade the bank's rating.

Belgium and France are now deciding how to move forward.

The Belgian Cabinet met Thursday morning on Dexia and set its targets on how the state guarantees should be divided up between the countries concerned.

The country's Prime Minister Yves Leterme said the cabinet was looking at ways of how to give Dexia's Belgian unit "stronger roots" in the country.

Earlier this week, Leterme said Belgium would not take up as much as two-thirds of state guarantees, as it did in a rescue effort for Dexia three years ago.


Associated Press writer Raf Casert contributed from Brussels.