France and Belgium to guarantee Dexia bank

The governments of France and Belgium, joint shareholders in the troubled bank Dexia, moved to guarantee its debts on Tuesday as its shares plunged on rumours it faces collapse or break-up. The bank is in danger of becoming the first major European banking institution to fall since the sovereign debt crisis began last year. 

AFP/OLIVIER LABAN-MATTEI

In trading on Tuesday, shares were down 29 per cent. They lost more than 10 per cent on Monday on warnings of an imminent credit rating downgrade over fears about its liquidity and wider concerns of exposure to eurozone sovereign debt.

Some 95 billion euros in assets that are weighing heavily on the bank could be split off.

Dexia is heavily locked into long-term financing deals with French local authorities, and deals in this area could be the first part of the bank's operations to be hived off.

According to reports in Le Figaro, a "bad bank" could be created to hold its toxic assets, and state guarantees could be given to cushion Dexia from damage from losses.

The 70 billion euros in such assets would likely be taken over by a special vehicle created by the French state-owned Caisse des Depots and the Post Bank, Le Figaro said.

French banks have been hit especially hard as ratings agencies have marked them down for having over-invested in risky Greek and other weak eurozone.

Belgium’s Finance Minister Didier Reynders discussed the bank's problems during a meeting with his French counterpart Francois Baroin on the margins of eurozone talks in Luxembourg on Monday.

The two finance ministers held their direct talks amid rising concern among eurozone counterparts at the knock-on effects for an under-capitalised banking system if Greece defaults and other sovereign debt risks emerge amid a sharpening economic downturn.