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Dexia Set for Restructing
BUSINESSOCTOBER 5, 2011, 5:22 A.M. ET.
By WILLIAM HOROBIN, INTI LANDAURO and LAURENCE NORMAN

BRUSSELS—France's central bank governor and finance minister Wednesday said Franco-Belgian lender Dexia SA will be restructured in the coming days, but the fallout on public finances and the banking sector will be limited.

"I think there should be a solution tomorrow. It is undeniable that Dexia cannot remain in its current state. It's been hit by very bad management and a business model" with high liquidity needs, French Finance Minister François Baroin told RTL radio. Speaking a few minutes later on Europe 1 radio, Bank of France Governor Christian Noyer added that "we are on the cusp of a restructuring of Dexia."

Dexia is headed for a major breakup, which seems likely to include setting up a so-called bad bank. According to people familiar with the matter, at least €125 billion ($166.9 billion) of assets could be shifted into the bad bank that will benefit from Belgian and French government guarantees.

Dexia's public-finance arm will most likely be taken over by French savings banks Caisse des Dépôts & Consignations, or CDC, and La Banque Postale, according to one scenario being discussed. Mr. Noyer said this was the plan of the finance ministry, while Mr. Baroin said it is the most serious option.

"It's in no way a failure," Mr. Noyer said. "The different parts of Dexia will probably live their lives separately. The French local authority financing part will be repatriated in France."

Dexia's share price was up 3.7% at €1.04 at mid-morning, having shed earlier gains. However, the share lost around a third of its value in the first two days of the week. Meanwhile, Belgian Finance Minister Didier Reynders said Wednesday that the government is ready to invest in the bank.

"We're certainly ready to invest, but in what form, and who our partners should be is the subject of discussion in coming days. I have no pre-decisions about this," Mr. Reynders told Bel RTL radio.

Dexia's management has been in touch with a lot of players, Mr. Reynders said, without elaborating, and he reiterated that Belgium doesn't plan to sell its stake in any of the banks it has supported in the financial crisis until share prices are healthier.

Both Messrs. Baroin and Noyer stressed that the impact on public finances will be limited. Indeed, Mr. Baroin noted that guarantees pledged to banking institutions don't increase debt levels according to official European statistics agencies. Meanwhile, Mr. Noyer dismissed the idea that pledging state guarantees will harm France's top notch triple-A sovereign-debt rating.

"I'm not at all worried," he said. "The states won't have to guarantee any more than what they guaranteed a few years ago ... The French and Belgian states will put much less money into this operation than the English put into Royal Bank of Scotland Group or Barclays."

Both French policy makers described Dexia as a "particular case" and played down the possibility that Dexia could be a precedent for other European banks.

"For French banks, they are very solid. Frankly, I'm much less worried about French banks than American banks," Mr. Noyer said. "We don't have more problems than others. Our banks are in very good health."

In a research note Wednesday, ING analysts Albert Ploegh and Maarten Altena said they didn't believe that guarantees on long-term funding or a recapitalization will be sufficient to prevent the bank's breakup.

"We are not sure whether a nationalization of Dexia Belgium ... might be an alternative, but we see similarities with 2008 and" the splitting up and nationalizations of Fortis/ABN. "The difference now is that we believe governments are not keen on nationalization, as this will contaminate sovereign ratings, and lead to several negative knock-on effects for other financials."