Following a year-long investigation and three weeks of taxing negotiations, Dexia, the European Commission, and authorities from France, Belgium and Luxembourg have finally managed to agree on the restructuring of the bank. On the evening of 5 February, the parties reached an agreement in principle, approved by Dexia’s Board of Directors, which requires the bank to reduce its balance sheet by 35% (compared with 2008) by 2014, from €650 billion to €430 billion. This agreement still needs to be formally ratified by the new Commission. The reduction is in line with the restructuring obligations imposed on other banks, such as ING and Commerzbank, in order to ensure that they can survive without further public aid and reduce the distortions of competition associated with the aid received.

To this end, and in return for the subsidies received from the French, Belgian and Luxembourg states to help it overcome the crisis – amounting to €6.4 billion in injections and €100 billion in guarantees - Dexia will have to part with several assets. It agreed to divest, by the end of October 2012, its Italian subsidiary Crediop and its Slovak subsidiary Banka Slovensko, as well as its insurance activities in Turkey and, by the end of December 2013, its loan to the local authorities in Spain through Sadabell. Moreover, it must relinquish its activities in Singapore and Russia in order to essentially focus on the Benelux states. The Franco-Belgian bank will no longer be able to resort to state guarantees from the end of June, instead of the end of October. Additionally, it is prohibited from making any further acquisitions until the end of 2011. The bank must also review its business model so as to redirect its refinancing towards periods longer than one year, increasing this share of its balance sheet from 50% today to 90% by 2014.

The sacrifices are indeed heavy, but for Pierre Mariani, CEO of Dexia, the essential point is that the Commission considered its restructuring plan to be credible, and thus the viability of the bank without recourse to public aid in the future. “The finalisation of the discussions with the European Commission is an important milestone for our group, putting an end to a period of uncertainty”, he said late on 5 February.

DISINVESTMENT ALREADY BEGUN

Echoing his comments, Jean-Luc Dehaene, chairman of the Board of Directors, added that “the European Commission acknowledged the progress in Dexia’s transformation to date”. Last year, the group had already begun to review its obligatory portfolio, put a stop to the riskiest market activities and divest some assets, such as the US subsidiary FSA, as well as shares in France’s Crédit du Nord and Austria’s KommunalKredit.

This agreement was welcomed by the market and, on 8 February, Dexia acknowledged the highest rise in the CAC 40, its shares having jumped by 7.6%. n