Dexia Bailout On Verge Of Collapse, Threatens To Take France AAA Rating Down With It

Having followed the fortunes of the beleaguered Belgian bank from before it appeared on anyone's worksheets, we are hardly surprised that the EU Commission charged with confirming the good-bank / bad-bank restructuring is concerned at the deal that Belgium has with the French (and Luxembourg) government to backstop/finance Dexia's debt. Belgium's De Standaard (and two other European newspapers) today suggests the Belgians fear the EUR90bn deal is 'not feasible' as it stands (with a Belgium 60.5%, France 36.5%, and Luxembourg 3% weighting). Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal. Belgian FinMin Reynders would not confirm the renegotiations but was evidently waiting on the commission's 'comments or additions'. The French are obviously not-amused and of course, any increase in the size of France's guarantee will further impact its ability to maintain the much-vaunted AAA rating.




The initial bailout deal was profitably traded via our suggestion of DEX-Belgium compression and as the orange oval shows risk was very rapidly transferred from DEXCL (Dexia's CDS level compressed - green arrow) onto the balance sheet of Belgium (red arrow showing how Belgium CDS underperformed France CDS).

The last week or two has seen systemic concerns creep into all of the spreads involved  - though notably the spread between Belgium and France has been relatively stable around 110bps. Idiosyncratically DEXCL has decompressed notably as chatter about the deal's collapse grows louder.

We suspect that there will be some renegotation that pushes more pain to bondholders in return for France shouldering more of the burden and so a DEXCL decompression vs Belgium-France compression trade makes some sense (as a risk-transfer trade) but cost of carry is high. Perhaps the simplest way (and cheapest) is outright short France credit.

From De Standaard: Dexia Rescue Plan Is Not Feasible (Via Google Translate)

BRUSSELS - Belgium asks France to renegotiate the bailout Dexia Holding, also on the distribution of the state guarantee of 90 billion. The euro crisis plan unfeasible.From our editors coup de théâtre in the Dexia case. While President Jean-Luc Dehaene again yesterday for the special Dexia commission appeared to a clarification of the trap and the dismantling of Dexia shows an important part of the Belgian-French agreement of October 9 obsolete. In particular, the rescue plan that Belgium France and Luxembourg have agreed in early October for Dexia Holding (the rest couch, red), stands on the slope. And this includes the much-discussed state guarantee of 90 billion to finance the remaining banks - especially the more massive historical bond portfolio and the unsold subsidiaries of Dexia behind. Belgium dropped by France to convince the majority (60.5 percent) of the financing of the remaining bank Dexia is a Belgian guarantee to cover.


This guarantee, Dexia to enable the next year to 54 billion euros from the Belgian bond market to pick up. This would come in direct competition with Belgium itself, that money needs to get his debt and deficit financing. The Belgian bond market is quickly drying up. This makes it impossible for the coming years tens of billions of Dexia to retrieve. Specialists estimate that for Dexia 'only' room for 20 to 25 billion euros from the Market. Since the agreement Dexia Belgium mistrust of financial markets, allowing long-term rates has increased dramatically: the beginning of October is 3.6 percent in Belgium paid ten-year loan, now it is 4.9 percent. And that has consequences for the rest of the financing bank.


"Dexia becomes intolerable as it is such high interest rates on the market to pay, insiders warn. French resort Belgium, France and the European Commission has therefore already stated that the bailout Dexia Holding need re-negotiation. As a possible way a new agreement in which the French, backed by Belgium, one additional share of the funding to take on. Much time is not. For the euro crisis threatens not only Belgium in need of money to bring the whole bailout for Dexia falters. Dexia Holding should not only pay high long-term market, it needs also a costly fee for the state guarantee.


Total (financing) costs of the massive bond portfolio in the rest thereby threaten the bank proceeds to beat. Allowing the remaining banks are structurally unprofitable. All parties involved are treated with the hands in the hair. "What now?" The remaining bank fail let go is not an option, it reads. The consequences for Dexia Bank Belgium (DBB) could not be foreseen. "The Belgian state bank to the rest Dexia bank an overdraft - no guarantees, so - given 20 to 25 billion euros, and then that money completely lost."


The only solution that Belgium sees that France itself the majority of The money the rest of Dexia bank needs from the French bond market gets. Belgium would be the part that France collects on behalf of our country, with guarantees covering. But the French are not designed for jumping. They believe that Belgium commits perjury. Paris itself is under great pressure. The credit agency Moody's yesterday put pressure on France once again by openly to question the sustainability of the French AAA credit rating. In addition, in the spring French presidential elections. Dexia Belgium ruin.

It seems that Belgium is 'pulling a Greece' - knowing that it has all the leverage and France has much larger exposure to the problem - once again the unintended consequence of capitalism wiothout failure is writ large.


Chart: Bloomberg