Franco-Belgian bank Dexia agreed early on Monday to the nationalisation of its Belgian banking division and secured 90 billion euros ($121 billion) in state guarantees in a rescue that could pressure other euro zone governments to strengthen their banks.
Under the terms of the rescue, Belgium will pay Dexia Group 4 billion euros ($5.4 billion) to buy Dexia Bank Belgium, the largely retail Belgian division, which has 6,000 staff and deposits totalling 80 billion euros from 4 million customers.
Dexia also secured state guarantees of up to 90 billion euros to secure borrowing over the next 10 years. Belgium would provide 60.5 per cent of these guarantees, France 36.5 per cent and Luxembourg 3 per cent.
Under the rescue plan Dexia will be left with a portfolio of bonds in run-off, which totalled 95.3 billion euros at the end of June and including 7.7 billion euros of junk class and some 7.4 billion euros of mortgage-backed securities.
As part of the bank's break-up Dexia is also in talks to sell its Luxembourg unit. A Luxembourg government official said that members of Qatar's royal family were ready to buy the business with the state taking a minority stake.
The future of Dexia's other business units remained uncertain, including its stake in Turkish lender Denizbank and its RBC Dexia Investor Services global joint venture with Royal Bank of Canada.
Trading in Dexia's shares, which have been suspended since Thursday afternoon, was due to resume later on Monday.
Dexia's announcement of the overall rescue deal came after a board meeting that lasted some 14 hours from mid-afternoon on Sunday after France, Belgium and Luxembourg had agreed a rescue plan.
The extraordinary meetings at the end of the weekend had echoes of the dismantlement of financial group Fortis in October 2008 by the Netherlands, Belgium and BNP Paribas. Then, shareholders protested at the initial terms offered, and only agreed on improved terms six months later.
The governments rushed to support Dexia after it became the first bank to fall victim to the two-year-old euro zone debt crisis, as a credit crunch denied it access to wholesale funds and sent its shares down 42 per cent last week.
"We found an agreement on the fair division of the costs related to the management of the 'rest bank'," Belgian Prime Minister Yves Leterme told a news conference in the early hours of Monday.
SOVEREIGN CREDIT RATINGS
The likely burden of bailing out Dexia led ratings agency Moody's to warn Belgium late on Friday that its Aa1 government bond ratings may fall.
The country had a debt-to-GDP ratio of 96.2 per cent last year, lower only than Greece and Italy among euro zone members and on a par with bailout recipient Ireland.
Finance Minister Didier Reynders said that the deal should not push Belgium's debt-to-GDP ratio above 100 per cent.
On the French side, Finance Minister Francois Baroin said in a TV interview that the rescue should have no impact on the country's prized AAA credit rating since it was only contributing guarantees and not funds directly. He also said Dexia was a "unique" case and no further bailouts of French banks would be needed.
Moody's duly confirmed on Monday that the Dexia rescue would have no impact for now on France's AAA credit rating which still carries a "stable outlook".
Dexia, which used short-term funding to finance long-term lending, found credit drying up as the euro zone debt crisis worsened. The problem was exacerbated by the bank's heavy exposure to Greece.
Mariani said one of the bank's errors was one of "naivety" in agreeing too easily to governments' requests that banks maintain their exposure to Greece. "We never had a problem of solvency but one of liquidity given our large portfolio of sovereign debt," he said.
Dexia has global credit risk exposure of $700 billion - more than twice Greece's GDP - and its rescue has stoked investors' anxieties about the strength of European banks in general.
The governments' rescue package came as the leaders of France and Germany agreed that European banks needed to be recapitalised, but papered over differences on how that would happen.
Paris wants to tap the euro zone's 440 billion euro ($594 billion) European Financial Stability Facility (EFSF) to recapitalise French banks, while Berlin is insisting the fund should be used as a last resort.
There were fresh reports over the weekend that big French banks BNP Paribas and Societe Generale might agree to capital injections as part of a Europe-wide plan to boost lenders' financial strength. However, both banks deny such plans.
Dexia's board had also instructed the company's chief executive to seek backing from French state bank Caisse des Depots. A consortium of CDC and La Banque Postale, the French post office's banking arm, would ensure the financing of public entities in France.
Of further asset sales Mariani did not comment on Denizbank and RBC Dexia but did say that the bank would hold onto Dexia's asset management business and that no sales of Dexia Sabadell in Spain, Dexia Crediop in Italy and DKD in Germany were planned given their sovereign debt holdings.