Dexia bank gets euro 6.4 billion bailout

Aoife White , The Associated Press , Brussels | Tue, 09/30/2008 2:06 PM | Business

Dexia became the second Belgian bank this week to secure a government and shareholder bailout Tuesday when Belgium, France and Luxembourg said they would inject almost euro6.4 billion (US$9.2 billion) to keep the business afloat.

Dexia, a French-Belgian specialist in ending to local governments that ran up huge losses in its U.S. operations, closed nearly 30 percent lower Monday - triggering emergency talks with government officials.

Belgian authorities and Belgian shareholders said in a statement that they would invest euro3 billion in the bank, while the French govenment - via its investment arm CDC which holds just over 10 percent in Dexia - will invest another euro3 billion. Luxembourg will add euro376 million.

For Dexia, the Belgian and French investments come in the form of a capital increase that will issue new shares, while the Luxembourg government will get nely issued convertible bonds.

In return the bank promised to improve the way it is run. In a statement, the governments and shareholders said they would take "necessary measures to significantly improve the group's corporate governance, in particular as concerns the governing bodies."

Belgium is spliting its share between the federal and regional governments, with euro1 billion (US$1.43 billion) each from the federal state, the three Belgian regions combined and shareholders Gemeentelijke Holding NV, Arcofin CV and Ethias.

Belgian Prime Minister Yves Leterme told VRT news that "given the crisis situaton around the Dexia group we took concrete and correct decisions to reinforce Dexia's health so that the group can face the events playing out in financial markets."

The French government will invest euro1 billion, with its state investment arm Caisse des Depots et Consignations injecting euro2 billin. This will give France a 25 percent stake in Dexia, the Elysee palace said in a statement.

"This decision was taken to guarantee the continuation of financing for local French governments for whom Dexia Credit Local is the main lender, as well as to contribute to the security and stability of the Frenchand European financial systems," the government said.

Dexia was one of several European banks to see its stock price drop sharply Monday on fears that they would find it hard to cover potential losses as credit conditions tighten.

Belgium, the Netherlands and Luxembourg moved to save Belgian-Dutch bak Fortis on Sunday, pumping euro11.2 billion (US$16.4 billion) after its shares shrank by a fifth Friday. Traders saw the bank as overleveraged and lost confidence in its ability to pay for its expensive purchase of Dutch bank ABN Amro.

Fortis and Dexia are finding it hard to borrow the billions of euros (ollars) they need as a financial market crisis freezes borrowing.

Dexia ran into trouble with its U.S. bond insurance unit FSA which was hit hard by the subprime housing crisis, which saw loans made to people with poor credit drop sharply in value on worries that borrowers could not make costly repayments.

FSA quit asset-backed investments last month after setting aside US$936 million (euro639 million) in the second quarter and securing a US$5 billion (euro3.4 billion) line of credit from Dexia to cover potential losses.

But Dexia was also hurt by the collapse of U.S. investment bank Lehman Brothers, saying it expects that to cause it euro350 million (US$512 million) in losses.

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