Dexia first European bank to crack

French and Belgian government stepped in to ‘quarantee’ (quarantine and guarantee) the finances of the troubled Dexia bank after its shares tumbled more than 37% on talk that it will be broken up.

The governments, working with central banks, said they would take all measures necessary to protect Dexia’s account holders and creditors.

“To this end, they pledge to guarantee financing raised by Dexia,” Francois Baroin and Didier Reynders, the countries’ finance ministers, said in a joint statement.

The statement made clear the aim was to protect account holders and creditors of the Franco-Belgian financial group.

Dexia shares, which fell 10% on Monday after Moody’s warned it could be downgraded, fell heavily during early trading after the company’s board urged its chief executive Pierre Mariani to fix the lender’s “structural problems”.

The announcement by the lender followed an emergency board meeting last night where a break-up of the bank was though to have been discussed.

“In the current environment, the size of the non-strategic asset portfolio impacts the group structurally,” Dexia said in a statement on Tuesday. “This is why the board of directors asked the chief executive officer, in consultation with the relevant governments and the supervisory authorities, to prepare the necessary measures to resolve the structural problems.”

Dexia is still labouring to resolve funding issues that led to a bailout during the 2008 financial crisis, when short-term credit dried up. At the time much of its long-term lending to public authorities was financed by short-term borrowing.

On top of that it has heavy exposure to Greek debt, which has weighed on the shares as markets bet that a Greek default is inevitable.

Today’s fall in Dexia shares left its equity valued at at less than €2.5 billion, according to Reuters data. That contrasts with Dexia’s holding of €3.8 billion of Greek sovereign bonds at the end of June, and total credit risk exposure to the country of €4.8 billion.

The French holdings in Dexia are thought to be the stressed part of the bank. One suggestion is that the bank be broken up into a good bank and bad bank. However, Paris is thought to be reluctant to be left holding the bad debt in order to protect its AAA rating with many of its banks heavily exposed to to Greek debt.

Belgians on the other hand are happy to break Dexia up and create a bad bank, with the viable Brussels end of the business available for a sell off.

“It could be the canary in the coalmine,” said one diplomat, as other banking stocks were dragged lower.

“Dexia is an extremely complicated file,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a “hold” rating on the shares. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”