10/10/2011 03:53 EDT | Updated 12/09/2011 05:12 EST

Belgium nationalizes Dexia subsidiary for $5.4 billion; bank gets $121 billion in guarantees

BRUSSELS - The Belgian state will buy the national subsidiary of embattled bank Dexia for €4 billion ($5.4 billion) and provide tens of billions of euros in new guarantees as part of a wider bailout of the lender, the first victim of a new squeeze in European credit markets.

The part-nationalization of Franco-Belgian Dexia, announced Monday, was triggered by other banks' increasing reluctance to lend to it due to its exposure to highly indebted eurozone states like Greece and Italy and to struggling municipalities in the United States.

Banks depend on loans to one another for a large part of their daily financing, but can quickly withhold them if they sense there is a danger that a counterpart might collapse and not repay the money. Such fears intensified last week, pushing Dexia, which had a larger dependence on such funding than many of its rivals, to need rescuing from the government.

Belgium's caretaker prime minister Yves Leterme said 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."

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.

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's shares plunged 33 per cent when they started trading again on the Brussels stock exchange Monday afternoon, but quickly recovered to rise 2.6 per cent to 87 euro cents. The shares had been suspended Thursday afternoon as management and governments were sorting out the bailout.

Announcement of the bailout 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.

To avert such a scenario, European leaders are now pushing banks to shore up their capital cushions. German Chancellor Angela Merkel and French President Nicolas Sarkozy said Sunday that they were working on a co-ordinated plan to recapitalize European banks that would be completed by the end of the month. Greece, meanwhile, said Monday that it had to rescue local lender Proton Bank.

However, many governments across the continent are reluctant to put up more taxpayer money to save the financial sector as they are already facing rising debts.

In the case of Dexia, the Belgian and French governments were concerned that a bailout 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 the bailout would lift the country's debt from around 97 per cent of economic output to about 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 announced it was in negotiations with a group of international investors interested in buying its Luxembourg subsidiary.

At a news conference Monday, the bank's management blamed the renewed problems on the risks that were piled up before they took over in 2008.

"We realized very quickly that we found ourselves in front of a very difficult mission," said Chairman Jean-Luc Dehaene. Efforts to strip down Dexia's balance sheet and shift funding from short-term to long-term were taken quickly, but management did not have enough time to get the lender back on track before it was slapped hard by the government debt crisis, Dehaene added.

The chairman insisted that Dexia faces a crisis of liquidity, not solvency — meaning it is not bankrupt, but just doesn't have the ready cash it needs in the short-term. That is why the bank managed to pass pan-European stress tests just this summer, Dehaene said.

Chief Executive Pierre Mariani added that a threat to downgrade the bank's credit worthiness by rating agency Moody's last Monday, exacerbated by rumours during the week, "put some pressure on group funding."


Don Melvin contributed to this story.