After being told that Dexia’s credit rating would be downgraded by credit rating agency Moody’s, on October 3, 2011, the bank’s shares dropped sharply. By the end of trading that day, one share was approximately one euro ($1.32), the lowest level the bank has ever seen. The situation did not improve the next day: at one point, shares dropped by as much as 40 percent.

Trading was suspended on October 6. It will resume trading on October 10. On Tuesday, October 4, the bank’s board met in an emergency meeting to discuss solutions to the problem. At a press conference after the meeting, caretaker Prime Minister Yves Leterme of Belgium said that the Belgian and French governments will each have a hand in propping up the bank.

“We are giving a new government guarantee and will take all the initiatives necessary for Dexia Belgium to consolidate. We still believe it has a future,” he said.At the meeting, a plan was formulated. First, Dexia would set up a “bad bank” fund where its troubled assets would go.

Second, the French municipal loan book would be given to La Banque Postale, a French bank, and Caisse des Depots et Consignations, a French financial institution. Last, Dexia would be split up, and would seek buyers for its healthy assets. Discussions for options about the split up of Dexia continued throughout the weekend.

This is the not the first time Dexia has needed government assistance. In late 2008, Dexia was bailed out by the Belgian and French governments and its shareholders. Belgium and France invested 6.4 billion euros into the bank. Each country owns 5.7 percent of the bank, while three Belgian regional authorities own a combined 5.7 percent of the bank.

Some bankers outside of France and Belgium are concerned about the split up of Dexia. “The government has to reach a deal this weekend, or we’ll see trouble on the interbank market next week,” said Michael Rohr, a banking analyst with Silvia Quandt Research GmbH in Frankfurt, Germany.

Some inside France are concerned about how the split up will affect France’s credit rating. According to French economist Jacques Delpla, the split will not harm the country’s credit rating “Rating agencies judge the sustainability of a country’s debt. This would be a one-off investment that could yield big profits, so even if France spends a huge amount recapitalizing the entire bank system, it should not affect its rating,” he said.

Image Courtesy of   http://www.flickr.com/photos/worldeconomicforum/

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About the author

Mei Tsai
I am currently a fourth-year student at the University of Oregon double majoring in Journalism and Chinese. I'm interested in a lot of things, sometimes all at once - I've been told I have attention span of a five year old. If you've got an interesting opinion, story, experience, hobby, idea - I'm all ears!