In recent (and totally useless) “stress-free” tests, Dexia passed with flying colors. Dexia passed those tests only because the tests did not include any writedowns of Greek debt. Tonight, an emergency board meeting is underway because Dexia is massively undercapitalized as a result of its Greek bond position.

Please consider Dexia Board Said to Meet as Sovereign Debt Crisis Curbs Funding

The board of Dexia SA, Belgium’s biggest lender, is meeting to discuss options including a possible breakup after Europe’s debt crisis reduced its funding, a person with knowledge of the talks said.

Dexia, which finances municipalities in France and Belgium, may split off its French business partly under the oversight of state-owned Banque Postale SA, said the person, who declined to be identified because the matter is confidential. The discussions are complex because Dexia is based in Brussels and Paris, and has both governments as shareholders. An announcement may come as soon as tonight, the person said.

“Dexia is an extremely complicated file,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a “hold” rating on the shares. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”
In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank’s existing shareholders, which include Caisse des Depots et Consignations and Belgium’s Holding Communal SA, provided an additional 3 billion euros.

Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

Belgian Finance Minister Promises Another Bailout

Euronews provides additional details in Dexia dragged down by Greek debt worries

The French and Belgian government will do the right thing to support bank Dexia in the current turbulent markets. So said the Belgian Finance Minister Didier Reynders.

It is now looking more likely that Dexia’s state shareholders will have to consider a second bailout of taxpayers’ money.

Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis isn’t resolved.

Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit , Deutsche Bank, Lloyds, Societe Generale and Barclays each face a deficit of over seven billion euros under its stressed scenario.

Dexia, which received a six billion euro bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.

Dexia’s market capitalisation is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits.

The company has taken a 338 million euro hit to cover a 21 percent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.

But with market prices indicating investors could suffer a loss of 50 percent or more, Dexia’s Greek bill could be more than one billion euros more.

Bondholders Do God’s Work

Logically speaking, Dexia bondholders should have been wiped out in 2008. They should be wiped out again now. Instead, look for Belgium and France to throw more taxpayer money at bondholders.

The best explanation I can come up with is as follows: bondholder of banks do “God’s work” just as Goldman Sachs does.

Mike “Mish” Shedlock
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