All signs indicate that Dexia Bank will be the first large European bank to fall to speculation about losses on its loans to Greece and that might be a sign of things to come for the global economy.
Anthony Faiola and Howard Schneider in the Washington Post write: "The sudden concern over Dexia, which is heavily invested in European government bonds whose value is now in doubt, highlighted the threat that euro-zone bank failures could trip up the world economy. The governments of France and Belgium, co-owners of Dexia since an earlier 2008 bailout, pledged support for the lender and reassured depositors that they would not lose their money. The bank may be heading for a restructuring that would segregate its government bonds and other suspect investments in a new 'bad bank.'
It also says a lot about the so called stress tests on European banks. The Financial Times reports that when regulators ran stress-tests on European banks in July, Dexia not only passed the exercise, it emerged as one of the safest banks in Europe. How useless was that? And what does it say about the state of the other European banks? Who's next?
If Dexia goes, it will knock France and Belgium for six. Under the plan, the Belgian government will take the retail bank which is mostly in Belgium and try to sell it. France will fold the French bit into La Banque Postale and the Caisse des Depots et Consignations, both of which are owned by the French government. As Bloomberg
reports, shareholders will get nothing.
The problem for France and Belgium is that if they want to guarantee the short-term indebtedness of a restructured Dexia, it will have to show up on their balance sheets as a contingent liability. And if they have to make good on the guarantee, they will have to borrow the money in Euros and pay interest. That's why France and Belgium now face a ratings downgrade.
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