France and Belgium’s decision to break up Dexia SA three years after bailing the lender out shows how European governments are being hampered in rescuing banks without jeopardizing sovereign credit ratings, analysts said.
The two governments chose to preserve Brussels- and Paris-based Dexia’s consumer bank in Belgium and municipal lending unit in France because those operations were considered systemically and politically important, said people with knowledge of the matter who declined to be identified because the discussions are private. Dexia’s other assets will be sold to limit the cost of the bailout, the people said.
“France and Belgium have had to take a more drastic approach to keep the bill at a minimum this time,” said Jean- Pierre Lambert, an analyst at Keefe Bruyette & Woods Ltd. in London. “That means if something happens to a French bank, for example, France would probably fight to protect the domestic retail network but push the bank to sell non-core activities to reduce the costs and preserve the country’s AAA rating.”
The decision to dismantle Dexia coincides with a vow by Nicolas Sarkozy and Angela Merkel to outline a plan this month to recapitalize European banks as investors hesitate to extend short-term funding to banks on concern they will have to write down their holdings of Greek and other peripheral European sovereign debt. European governments are also facing growing pressure on their credit ratings as the region’s economy slows and the cost of bailing out banks increases.
Belgium, France and Luxembourg on Monday provided a 90 billion-euro ($123 billion) 10-year guarantee to cover Dexia’s funding needs. Belgium will provide about 61 percent of the cover and France about 37 percent of the backing.
The Belgian government is buying Dexia’s national consumer lending unit for 4 billion euros while French state-owned banks Caisse des Depots et Consignations and La Banque Postale are in talks to take over the bank’s French municipal lending unit, which provides loans to local governments.
France and Belgium each tried to get the other to provide a bigger share of the guarantee than their proportionate stakes in Dexia, the people said. The French state directly and indirectly controls about 26 percent, and Belgian entities own 44 percent.
Moody’s Investors Service placed Belgium’s Aa1 local- and foreign-currency ratings under review for a downgrade on Oct. 7, citing rising funding risks for nations with high levels of debt and the cost of additional support measures for banks including Dexia. The Dexia debt guarantee equals about 15 percent of the country’s gross domestic product, and 2 percent of France’s, according to estimates by KBW’s Lambert.
Impact on France
Moody’s on Monday said it saw “limited impact of Dexia’s bailout on France’s Aaa rating.” In a May report, it said French banks’ holdings of euro-peripheral sovereign bonds “are a contingent liability on the government’s balance sheet.”
“In the back of people’s minds, if the senior debt market doesn’t restart and banks had to start to turn to government debt guarantees to raise financing, it would be another thing weighing on the credit worthiness of some countries,” Nomura Holdings Inc. analyst Jon Peace said. “If you look at debt and deficit levels, Italy and Spain and France have less room than Germany to avoid a potential downgrade through bailouts.”
France’s effort to protect its AAA credit rating isn’t helping negotiations with Germany about how to recapitalize European banks, said Philippe Waechter, chief economist at Natixis Asset Management in Paris.
Their views vary on how to use the European Financial Stability Facility, he said. The fund, set up in 2010, is being given increased flexibility -- including the ability to channel funds to national governments to support banks -- under the terms of an agreement reached July 21 by European leaders.
“The Germans aren’t so keen to use the European Financial Stability Facility as a means to recapitalize the banks while the French want to use it precisely because it wouldn’t jeopardize their country’s AAA,” Waechter said. “We’re finding ourselves in a complicated situation in Europe where states are constrained, but really need to prop up banks’ capital.”
German Chancellor Merkel and French President Sarkozy pledged in Berlin two days ago to come up with a plan to recapitalize Europe’s banks. Sarkozy said they would deliver a plan by the Group-of-20 meeting in Cannes, France on Nov. 3.
The two leaders have yet to detail how the bailout fund would be used to help European banks. The region’s banks may need between 100 billion euros and 200 billion euros of capital provided through a European-wide program akin to the U.S.’s Troubled Asset Relief Program, according to estimates by analysts at Morgan Stanley, JPMorgan Cazenove and Nomura.
“In 2008, France put on the table a total of 360 billion euros in capital and guarantees for banks, about 20 percent of GDP,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “Today, that would be too much.”
France pledged to make available as much as 40 billion euros to bolster capital levels at its largest banks after Lehman Brothers Holdings Inc.’s bankruptcy. Sarkozy also set up a 320 billion-euro fund to guarantee bank debt.
Bank of France Governor Christian Noyer said in a Sept. 24 interview he sees “absolutely no reason” to reactivate that support system.
Germany has said it may turn to the fund it set up to rescue banks in 2008. The Soffin fund may need to be reinstated, a spokesman for Finance Minister Wolfgang Schaeuble told reporters in Berlin last week. The government has spent about a tenth of the 480 billion-euro fund.
Under pressure by regulators to shrink their balance sheets, banks may speed up asset sales to free capital. European lenders are selling more than 30 billion euros of loans and non- core units, up from 26 billion euros so far this year, according to a KPMG LLP study released last week.
This is a small portion of the 1.3 trillion euros of non-core assets European banks could potentially offload over the next years, according to an April report by PricewaterhouseCoopers LLP.
“Asset disposals will very much pick up,” Nomura’s Peace said. “Some banks such as the French have already committed to sales, but it’s not a seller’s market at the moment and difficult to achieve good prices.”
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