10/10/2011 12:36 EDT | Updated 12/09/2011 05:12 EST

Belgium nationalizes Dexia subsidiary for €4 billion; bank gets €90 billion in guarantees

BRUSSELS - Embattled bank Dexia said Monday the Belgium state will buy its Belgian subsidiary for €4 billion ($5.4 billion) as part of a restructuring of the lender amid a severe liquidity squeeze.

Dexia is the first large European bank to need a state bailout since the financial crisis of 2008, after it came under intense funding pressure due to its exposure to highly indebted eurozone states like Greece, Italy and Spain as well as struggling municipalities in the United States.

Belgium's caretaker prime minister Yves Leterme said that the nationalization was necessary to insulate the Belgian retail bank from the risks of the wider group, Dexia SA. He said support from the state ensures that all of Dexia's clients "can be sure and certain that their money is in full security at Dexia Belgium."

On top of the nationalization, the governments of Belgium, France and Luxembourg together will provide an additional €90 billion ($121 billion) in funding guarantees for the bank for up to 10 years. The guarantees will secure a so-called "bad bank" for Dexia, into which the bank's toxic assets will be transferred.

Belgium will provide 60.5 per cent of these guarantees, 36.5 per cent will come from France and the remaining 3 per cent from Luxembourg.

At the same time, Dexia's board is in negotiations with French banks Caisse des Depots et Consignations and La Banque Postale to find a solution to the financing of French local authorities, in which Dexia plays an important role.

Dexia said backing from the Caisse des Depots would reduce its short-term funding requirement by almost €10 billion.

The announcement followed marathon negotiations between the three governments and the bank's management.

Officials were worried that a collapse of the bank would exacerbate an already tight funding environment for banks in Europe, as analysts warn of a credit crunch similar to the one that followed the collapse of Lehman Brothers.

At the same time, the Belgian and French governments were concerned that putting up more money for bank bailouts would threaten their credit rating and drive up interest rates on their bonds.

On Friday, Moody's Investors Service placed Belgium's Aa1 rating on review for a possible downgrade, due in part to the expected expense of guaranteeing that Dexia's depositors will lose no money.

Belgian finance minister Didier Reynders said that the bailout would lift country's debt from around 97 per cent of economic output to around 98 per cent.

The French government, too, was under acute pressure to save Dexia as the bank is one of the country's largest lenders to towns and cities.

France and Belgium already became part owners of the bank during a €6.4 billion bailout in 2008.

Last week Dexia already announced that it was in negotiations with a group of international investors to buy its Luxembourg subsidiary.


Associated Press writer Don Melvin contributed to this story.