Bloomberg News

Dexia Obtains More Guarantees as Bund-Yield Drop Adds Stress

June 06, 2012

Dexia SA (DEXB), the French-Belgian lender that is being broken up, obtained European Union approval for a 10 billion-euro ($12.6 billion) increase in state guarantees as the bank faces margin calls after German bond yields declined.

“The purpose of the guarantee and its current increase is to preserve the financial stability of the member states concerned, given the systemic importance of Dexia,” the European Commission, the EU’s antitrust regulator, said today in a statement. “The ceiling is thus raised to a maximal amount of 55 billion euros.”

Dexia, which last week won a four-month extension of the temporary government backstops until Sept. 30, has tapped almost 44.8 billion euros of the guarantees, according to data compiled by the Belgian central bank. The lender, based in Brussels and Paris, also still has 21.6 billion euros of government-backed debt outstanding from a 2008 guarantee agreement.

The bank sought additional backstops because it has to put up more collateral to shield its counterparties in interest-rate swap contracts from losses following a decline in the benchmark German 10-year bond yield to a record low last week. Dexia’s outstanding swap contracts have a notional value of 1.5 trillion euros, underlining the bank’s importance to financial stability in Europe, Chief Executive Officer Pierre Mariani said on Feb. 23.

Margin Calls

EU regulators are probing the guarantees amid “doubts” that the state support is compatible with EU rules for banks in crisis because it adds to earlier “massive aid” to rescue the bank, the commission said in a statement today.

The EU “will take a final decision on the temporary guarantee as part of its final assessment of the orderly resolution plan of Dexia,” the regulator said.

The commission must examine large government subsidies to companies and can order aid to be repaid if it harms competition.

Benoit Gausseron, a spokesman for Dexia in Paris, declined to comment about the amount of collateral the bank needs to pledge to meet so-called margin calls. French Finance Minister Pierre Moscovici told reporters in Paris that France and Belgium agreed to boost funding guarantees provided to Dexia, echoing comments his Belgian counterpart, Steven Vanackere, made on Radio 1 earlier today.

Dexia has used most of the proceeds from issuing guaranteed debt to redeem unsecured loans provided by its former Belgian banking unit and to reimburse part of emergency central-bank loans, which still amounted to about 12 billion euros in early May, according to Mariani. Under the terms of the temporary guarantee agreement, the lender needs to post collateral for most of the government-backed certificates of deposit that are issued by Paris-based Dexia Credit Local SA.

To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net


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