A big rescue operation looks imminent for Dexia SA after France's finance minister indicated that a solution to save the Franco-Belgian bank could be announced as soon as Thursday.
Dexia is highly exposed to the debts of some of Europe's more indebted countries, such as Greece and Italy, and is finding increasingly difficult to fund its day-to-day operations as other banks are reluctant to lend to it. Its problems echo credit crunch developments in the aftermath of the collapse of Lehman Brothers three years ago.
Dexia has been at the forefront of investor concerns this week over its exposure to potentially bad government debt. With the markets bracing for a Greek debt default soon, investors are concerned about what bonds Europe's banks are holding and banks themselves have become reluctant to lend to one another.
French finance minister Francois Baroin said Wednesday that Dexia "cannot continue in its present form, that is incontestable" and that the bank's supervisory board would unveil "a very important response" to the crisis on Thursday.
He also told French radio station RTL that a solution would likely involve French state-owned banks CDC and Banque Postale taking over Dexia's municipal lending operations.
"We are working on a solid, structured solution," Baroin said.
The French government is under acute pressure to save Dexia as the bank is one of the country's largest lenders to towns and cities.
Dexia shares have recovered some of their recent losses but remain sharply lower on the week. By early afternoon, they were up 7 percent in Brussels.
On Tuesday France and Belgium promised to prop up the bank and insure every cent of its deposits in response to a calamitous decline in the bank's share price over the past couple of days.
At one point Tuesday the bank's share price plunged nearly 40 percent, prompting France and Belgium to launch crisis-management initiatives designed to prevent a complete rout.
Dexia stock began to plummet Monday after Moody's warned it could be downgraded because of mounting difficulties it is facing getting short-term funding. In the wake of the warning, Dexia's board of directors called an emergency meeting.
On Tuesday, Dexia's board of directors issued a statement ordering the bank's management to take steps, in consultation with the Belgian and French governments, "to resolve the structural problems weighing on the group's operational activities and offer new growth prospects."
Belgian Prime Minister Yves Leterme said Wednesday that his country would not take on as big a load as it did three years ago when it was involved in the previous bailout of Dexia, alongside France.
One way forward being examined would be to isolate Dexia's toxic assets — totaling 100 billion euros ($132 billion) — in a "bad bank" while its healthy parts would be sold individually.
Speaking on Belgium's VRT network, Leterme did not want to use the label "bad bank" to describe where the toxic assets may be parked, and voiced his hope that in the long-term they could earn "good money."
Whatever emerges, it's the second time since 2008 that Dexia has needed government help. In the aftermath of the collapse of Lehman Brothers in late 2008, Dexia got a government and shareholder bailout when it ran into trouble with its U.S. bond insurance unit, FSA, during the U.S. subprime crisis.
As part of the deal then, Belgium, France and Luxembourg said they would inject almost 6.4 billion euros to keep it afloat.
The bailout led to Dexia being owned 17.6 percent by France's sovereign wealth fund, the Caisse des Depots et Consignations. The French and Belgian governments each own another 5.7 percent of the bank, and three Belgian regional authorities jointly hold another 5.7 percent stake.
Since the bailout, Dexia has worked to shore up its finances, and the statement it issued Tuesday said it was making progress.
But Europe's worsening debt crisis and the resulting reluctance among banks to lend to one another have exacerbated Dexia's troubles.
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