France and Belgium nationalize Dexia bank
PARIS - Europe’s debt crisis hit another milestone yesterday when the French and Belgian governments agreed to nationalize Dexia, Belgium’s biggest bank, infusing it with billions in taxpayer money after it became the first casualty of the Greek sovereign debt crisis.
Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France acknowledged Europe’s banks still need billions of euros more to cushion against a possible Greek default. In meetings in Berlin, they said that they would have a comprehensive solution by the time leaders of the G-20 group of nations meet in early November in Cannes, France.
“We are determined to do what is necessary to guarantee the recapitalization of our banks,’’ Merkel said.
They declined to provide any specifics, however, which could unnerve investors.
In a sign of how heightened the concern over European banks has become, government officials raced to prop up Dexia before financial markets opened today. Dexia SA “is the biggest eurozone bank failure in quite some time,’’ said Peter Zeihan, vice president at Stratfor, a geopolitical risk analysis company in Austin, Texas. “It will force investors and shareholders to take a second look at what they thought was stable.’’
Europe’s banks have become a flashpoint for governments as they try to rein in the region’s debt woes without worsening their own finances. Merkel, Sarkozy, and others have only recently conceded European banks may not be as sheltered from the storm as first thought, especially if the Greek crisis reaches larger countries. If that were to happen, other banks in Europe and the United States - as well as governments themselves - could feel further pressure.
But Europe’s leaders remain at odds on how to achieve their goals, including the best way to recapitalize banks. In a bid to ensure its credit rating remains intact, France wants to pump money from a developing bailout mechanism, the European Financial Stability Facility, into the banks’ capital. Germany insists the fund should be used only as a last resort, if the banks can’t raise more money on their own.
Merkel said European leaders would do “everything necessary’’ to reach a deal to ensure banks are adequately capitalized.
In France, some officials have sounded the alarm that too big of a bailout for Dexia could menace the nation’s sovereign debt rating, a notion the finance minister, Francois Baroin, was quick to dismiss.
Belgium is in a more difficult situation. Its debt is 97.2 percent of gross domestic product, the third-highest in the eurozone, after Greece and Italy. Moody’s Investor Service on Friday warned it could downgrade Belgium’s rating if the support of Dexia lifts the nation’s debt and investors start raising borrowing costs for Belgium.
Officials say the bailout of nearly $5.36 billion would not push its debt much higher.
It was the second bailout in three years for Dexia, a lender to European and US cities that got into trouble in 2008 after a huge portfolio of subprime loans it owned turned toxic. Dexia received money from France and Belgium back then, and was the biggest European recipient of loans from the Federal Reserve at the time.
Dexia, which has global credit exposure of about $700 billion, will create a so-called bad bank to house its troubled assets, including billions of euros worth of Greek, Portuguese, and Italian debt. Last night, the governments were still haggling over how to split the bill.
Last week, Dexia’s stock price plunged 42 percent and, as the company neared collapse, its shares stopped trading Thursday.
Dexia’s fortunes, and those of many other European banks, remain tethered to what happens to Greece. Germany’s finance minister, Wolfgang Schauble, told Frankfurter Allgemeine Zeitung “that we assumed in July a level of debt reduction that was too low’’ for Greece, implying Greece faced more difficulties ahead and a need for even more support.