With Dexia bank in need of additional public guarantees, France and Belgium plan to ask the European Commission for authorisation to provide €55 billion in support, until the end of September.

This extra money is necessary for the survival of the group that until recently was the world leader in municipal financing but whose situation has continued to deteriorate in the wake of its second rescue plan last autumn (see Europolitics 4289). Dexia is very exposed to interest rate derivative contracts and due to today’s low interest rates is obliged to put up more cash collateral with the guarantor states and therefore to use external financing. In early May, it also announced losses of €431 million for the first quarter of the year, due in large measure to the cost of the earlier public guarantees covering its financing and depreciations.

The existing €45 billion facility, authorised on a temporary basis, expires on 31 May and provided only a temporary cash shot in the arm “because more than half this amount was used to reimburse disposals of intra-group assets of Dexia Bank Belgique and part served as collateral for the guarantor states, at the request of Belgium,” explained Pierre Mariani, Dexia’s managing director, in an interview with the French economic daily Les Echos.

In October 2011, the Commission validated the dismantling of the bank and approved temporarily an additional guarantee scheme of €90 billion. Before giving its final green light, it was waiting for the group to submit a new restructuring plan, in late March, to correct the distortions of competition created by the different aid schemes provided by Belgium, France and Luxembourg since the start of the crisis. It has opened several investigations into the nationalisation of the Belgian subsidiary and the sale of the branch in Luxembourg (4399).

DISPOSAL OF DENIZBANK

The group’s restructuring also involves the disposal of other assets, such as its Turkish subsidiary, Denizbank, a deal that may be concluded with Russia’s Sberbank by the end of 2012, according to Mariani, at a price “close to” Dexia’s target. This would help it recover a bit more liquidity, but less than expected given the sharp depreciation of the Turkish currency since the acquisition of this subsidiary in 2006. Other disposals are also possible: Dexia Asset Management and RBC Dexia Investor Services, specialised in services to institutional investors, in which Dexia owns a 50% stake, with the Bank of Canada holding the rest.

Given Dexia’s systemic nature, its rescue is indispensable. But the Commission is going to think twice because it is disconcerted over having authorised the earlier restructuring plan and successive state aid schemes since 2008, only to see this first element of the bank’s rescue plan end in failure. The services of Competition Commissioner Joaquin Almunia have to obtain maximum guarantees of the group’s viability before authorising additional state aid. The EU executive refuses to give an approximate date for its assessment of this restructuring plan and the guarantees, stating only that “the analysis is under way”.

RECAPITALISATION AHEAD?

However, over and above the questions of guarantees and disposals, many analysts single out the insufficient level of equity in the light of Dexia’s balance sheet total and anticipate a capital increase in the short or medium term. As the group has to bear a heavy share of the cost of the existing guarantees, Dexia asked the Commission in February to be flexible (4399).

It seems obvious that it will not be able to boost its equity alone and that it will seek public funds again. Doing so will not be easy, however, given the tightening of public deficits imposed by the EU. Belgium, which bears 60.5% of the guarantees for Dexia, has announced that it wishes to reduce its intervention.