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As Predicted On Friday, Dexia CDS Rips And Stock Implodes On Partial Nationalization

Tyler Durden's picture


On Friday, as pertains to Dexia, a name that suddenly everyone is talking about yet which nobody except for this blog covered back in May, we predicted that "We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit." Sure enough overnight we got the following announcement from the French and Belgian Finance ministers: "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization. And with 5 year CDS ripping in a good 6-8 point upfront, bid at about 26 points at last check, down from 35 on Monday, getting out while the getting was good sure seems like a good idea. Alas, none of this will be any consolation to equity longs, whose value has just dropped over 20%, as this is nothing but a repeat of Bear Stearns. We repeat that at the end of the day, Dexia CDS will trade just wide of Belgian default risk, which we in turn expect to soar in the coming hours.

Some more observations from Nomura's trading desk:

On Dexia read across for Belgium/France. Required govt guaranteed issuance in the next six months or so looks to be around €30bn-€50bn given short term refi needs of €96bn of which €34bn was ECB funding. Not clear how this split will work between Belgian and French guarantees. In itself probably not enough to hit France’s AAA but adds to the pressure. At the moment no statement on any kind of government recap/nationalisation but in our view it is likely that Dexia will require capital support from the governments, the level of which will depend on proceeds received from any asset sales that take place in the restructuring.




The French and Belgian Finance Ministers announced a statement on Dexia (google- translated):


"As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia."


This is the "positive liquidity-related" headline we were anticipating. We think this implies that Dexia can raise guaranteed short-term funding. From their H1 2011 release, ST funding requirement was €96bn o/w €34bn was ECB funding. Moody's also mentioned higher collateral posting on derivatives/swaps -- so we expect that Dexia may need to raise €30-50bn guaranteed funds in the short term.


While there is "support" provided to depositors and creditors, we would note that "creditors" remain undefined at this stage but possibly includes senior unsecured. We would also note that this does not seem to imply explicit blanket guarantees but more "implicit" guarantees.


As we had stated in our earlier notes, we expect senior spreads to tighten, particularly in the short end (steeper curves). At this stage, we do not expect sub (LT2/T1) bonds to benefit given the lack of visibility into Dexia's reorganisation plans.



Following an emergency board meeting, Dexia releases a statement last night. The statement was quite vague on any concrete actions but stated that the CEO has been given authority to undertake measures to resolve structural problems and to open up new prospects for franchises in Belgium and France.


The other key point in the release was that support from the key shareholders' which include the French and Belgian State will be forthcoming: "The Group’s shareholders would like to reaffirm their unity and their solidarity in the phase which begins today." and "The states shareholders have confirmed their will to support Dexia Group, so that it can implement the various measures in an orderly manner and under the best conditions."


We think the Board resolution opens up the possibility of "split" which had earlier been denied - other newssites (FT, De Tijd) have reported that they believe that possibly all subsidiaries are for sale (Dexia Belgium, Dexia Asset Management, Denizbank). Also, the probability of a sale of public-lending portfolio to a CDC/BP JV remains high.


Overall, the release doesn't provide a lot of clarity except to affirm the state support. We continue to think that further liquidity supportive headlines/action on Dexia will be forthcoming - however, despite some tightening (which has already happened partially), senior spreads would remain wider than peers unless further clarity on the future is provided.


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Tue, 10/04/2011 - 06:47 | 1736324 GeneMarchbanks
GeneMarchbanks's picture

Epic Fail. It begins... Deutsche Bank just joined the race to failure, good to see the race heating up.

Tue, 10/04/2011 - 06:50 | 1736328 Ken Frost
Tue, 10/04/2011 - 06:57 | 1736345 Tyler Durden
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Or, instead of linking to tabloids, you can go back in ZH archives to February 2010, when we showed this data for the first time.

Tue, 10/04/2011 - 07:00 | 1736348 Ken Frost
Ken Frost's picture

even better:)

Tue, 10/04/2011 - 07:02 | 1736352 GeneMarchbanks
GeneMarchbanks's picture

The Swiss got Waffles beat...

Tue, 10/04/2011 - 08:06 | 1736476 The PolyCapitalist
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Great chart, but I assume that for Dexia you used just Belgium's GDP and not France's?

Both countries are bailing out Dexia so it would probably be more accurate to add together the GDP of both countries for Dexia's ratio.

Tue, 10/04/2011 - 08:17 | 1736508 EscapeKey
EscapeKey's picture

Would be nice if net notional derivative positions were added to these charts; I doubt the American banks would look as healthy if they were to be.

Tue, 10/04/2011 - 06:53 | 1736331 Dingleberry
Dingleberry's picture

Christmas is coming early!! Now if Goldman would go down too..

Tue, 10/04/2011 - 06:54 | 1736334 Reptil
Reptil's picture

Eeeermmm... How can you nationalize a bank (transfer toxic assets to the public account) when there's not even an elected government?

Oh the European Commission is the government, you say? Ah yes.. Mais Oui!

Timberrrrr.... (Attention, les Arbres!)


Tue, 10/04/2011 - 06:54 | 1736335 Dick Darlington
Dick Darlington's picture

Last time, 2008-2009, when Dexia was bailed out, the liability cap for governments was 150 billion. It was splitted btwn the governments as follows: Belgium 60,5%, France 36,5% and Luxembourg 3%.

Expecting Belgium downgrade pretty soon...

Tue, 10/04/2011 - 06:55 | 1736338 eigenvalue
eigenvalue's picture

If France wastes so much dry powder now, will it have enough capacity when Socgen, BNP and CA need help?

Tue, 10/04/2011 - 06:55 | 1736339 doomandbloom
doomandbloom's picture

Waffled, bitchez

Tue, 10/04/2011 - 07:08 | 1736362 Cassandra Syndrome
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In Bruges, Bitchez

Tue, 10/04/2011 - 06:55 | 1736340 slewie the pi-rat
slewie the pi-rat's picture

<zombies quietly shuffling paper>

Tue, 10/04/2011 - 06:56 | 1736341 HedgeAccordingly
HedgeAccordingly's picture

GOOD MORNING VIET.. errrr i mean Eurozone

Tue, 10/04/2011 - 06:56 | 1736342 papaswamp
papaswamp's picture

How do coutries deeply in debt 'back' anything? This literally is a game of 'let's pretend'. They are already trying to back other countries and now this? Seriously....when is an adult going to say, I'm sorry this is reality, the game of pretend is over.....

I wish I could pretend I have millions and go buy what ever I want...just tell the merchant I guaruntee that payments will be made....

Tue, 10/04/2011 - 07:00 | 1736349 jbc77
jbc77's picture

All they can do now is keep playing pretend. Thats how desperate the bankers are. Did we expect them to start telling the truth. The truth won't come out until an absolute and utter meltdown occurs....again. We are living in a modern day financial Twilight Zone. They will pretend until the can pretend no more. Grab some popcorn, this is gonna get good...the math never lies and always catches up in the end.

Tue, 10/04/2011 - 07:53 | 1736443 nonclaim
nonclaim's picture

How do coutries deeply in debt 'back' anything?

Full faith in the government... errm, if they had one, maybe.

So, let's pretend and all is well!

Tue, 10/04/2011 - 06:57 | 1736343 Drag Racer
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How much did the Koch brothers have on deposit at Dexia?

Tue, 10/04/2011 - 06:57 | 1736344 nmewn
nmewn's picture

All this burning paper.

Perfect timing...its getting cold.

Tue, 10/04/2011 - 07:02 | 1736351 wombats
wombats's picture

Since I don't own their stock and do not do business with them is there a reason for me to care about Dexia's fate?

Tue, 10/04/2011 - 07:36 | 1736411 richard in norway
richard in norway's picture

yes because it can/will pull other banks/finacial institutions down, watch those credit default swaps go bang

Tue, 10/04/2011 - 08:19 | 1736514 EscapeKey
EscapeKey's picture

I bet that's what people said about Kreditanstalt as well.

Tue, 10/04/2011 - 07:04 | 1736355 Migrated Bird
Migrated Bird's picture

Good Call ZH. Impressive. Not sure if I should be happy or sad. Cause if all your calls turn out to be right like this, we are looking at financial armageddon..

Tue, 10/04/2011 - 07:05 | 1736356 The Axe
The Axe's picture

Two for Tuesday....ZH  and those young people keeping their protest on Wall Street alive. Well done...

Tue, 10/04/2011 - 07:07 | 1736361 BandGap
BandGap's picture

The disconnect between mainstream reporting to the masses (eat the cheese, please) and reality is widening.  Or at least lacks the detail for proper inspection.  Or even worse, we have a population with their heads in the sand worrying about Tom Brady and NFL spreads.  Sad and frightening at the same time.

The winter of discontent looms. 

Tue, 10/04/2011 - 07:28 | 1736394 Dick Darlington
Dick Darlington's picture



Tue, 10/04/2011 - 07:52 | 1736442 sabra1
sabra1's picture

if BAC can have downtime, why not Dexia? what's wrong with them!

Tue, 10/04/2011 - 08:10 | 1736485 Mister Ponzi
Mister Ponzi's picture

Why is it necessarily positive for the CDS when Dexia is nationalized? I remember the nationalization of Fannie Mae and Freddie Mac which triggered the CDS of both entities, and the corresponding auction led to losses in some CDS classes.

Tue, 10/04/2011 - 08:14 | 1736497 Mike2756
Mike2756's picture

Yeah, it seems like only the depositors are being protected.

Tue, 10/04/2011 - 08:13 | 1736495 Mike2756
Mike2756's picture

Partial nationalization? No more bailouts for the bonus babies?

Tue, 10/04/2011 - 08:19 | 1736512 Peter K
Peter K's picture

I think we are all missing the point. The restructuring is to allow Dexia to "open new branchs in France and Belgium". Don't you people read :)

Tue, 10/04/2011 - 08:44 | 1736584 dcb
dcb's picture

yes, but you forgot the follow up headline. management walks away wikth millions in bonus money from the tax payer

Tue, 10/04/2011 - 12:04 | 1737425 BlackholeDivestment
BlackholeDivestment's picture

 It was reported in the EU news today, Belgian Frogs, with a financial virus known as ''Dexia'', attacked Labor. A trader on the floor was heard to have shouted out '' it was Lord of The Flies ...Bitchez''.

Wed, 10/12/2011 - 14:23 | 1766576 karmete
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