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12th Aug 2022

Belgium rescues troubled bank amid ratings warning

  • Dexia has a risk exposure twice the size of Greece's GDP (Photo: Valentina Pop)

The Belgian state has said it will pay €4 billion to purchase Dexia, a Franco-Belgian-Luxembourg bank with high exposure to Greek debt.

After a 14-hour board meeting on Sunday (9 October), Dexia's management agreed to the break-up and the state purchase of its largest division and the setting up of a so-called bad bank to deal with its troubled assets.

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The Belgian government will guarantee 60 percent of those assets, relieving Dexia of more than €14 billion in terms of immediate recapitalisation needs. The rest of the guarantees will come from France and Luxembourg.

"We found an agreement on the fair division of the costs related to the management of the 'rest bank'," Belgian outgoing Prime Minister Yves Leterme told a news conference early Monday morning.

The dismantling of Dexia comes only three months after bank was deemed 'safe' by a so-called EU stress test. In 2008, at the peak of the financial crisis, Dexia was helped by the same three governments with a cash injection of €6 billion and state guarantees of up to €150 billion.

Deemed 'too large to fail' by the Belgian, French and Luxembourgish governments, Dexia has a total credit risk exposure of over €500 billion, more than twice Greece's GDP. Its bond portfolio includes €21 billion in Greek, Italian, Portuguese, Spanish and Irish debt.

Trading in Dexia's shares was suspended on Thursday after a 42-percent plunge last week. Trading is to be resumed on Monday.

The bank was downgraded by Standard & Poor's before the nationalisation, a move which is likely to have an impact on Belgium's overall credit rating.

On Friday, Moody's ratings agency said it may have to dowgrade Belgium's Aa1 rating because of the current euro-area crisis and the knock-on effect from a potential Dexia bailout.

"It is unclear how far additional support measures would be likely to weigh on the balance sheet of the government," Moody's said in a statement last week.

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