Paying Dexia's Debts: The Risks of Globalized Finance

François Chesnais, Guest Blogger

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

The merger of the Gemeentekrediet / Credit Communal de Belgium and the Crédit Local de France and the formation of Dexia took place in 1996. Under joint leadership, the race to globalize became more and more reckless. A stake of 40% and then 60% was taken in Crediop, the biggest privately owned Italian bank specializing in financing local administrations. The group started diversifying into insurance in France, Belgium and Germany. Next came the acquisition of Financial Security Assurance (FSA), a US monoline insurance company also offering credit to municipalities. Smaller acquisitions, including a small Dutch private investment bank, specialized in wealth management. The final move prior to crisis was the setting up in Canada in 2006 of an institutional investment 50/50 joint venture with Royal Bank of Canada: RBC-Dexia Investor Services.

At its zenith Dexia claimed to be the world’s number one in financial services for public sector entities. In reality, it was a highly vulnerable corporation heavily engaged in activities in which assets were fairly if not very illiquid, and hence strongly dependent on refinancing and inter-bank credit. It was the archetype of a bank bound to fail in a mortgage-led crisis. In the turmoil following the Lehman Brothers failure on September 15, 2008, Dexia held out until September 29, when banks and financial institutions which had previously refinanced the group refused to do so because of predictable losses by the US affiliate FSA. It’s a testament to the imbroglios of financial globalization is that Dedfa was under Irish jurisdiction at the time.  In the late 1990s, Dedfa had moved its headquarters to Dublin to enjoy the very lax supervision and very generous tax treatment offered by the Irish government. On September 30, Moody’s downgraded Dexia’s long term debt and deposits ratings sharply (Aa1 to Aa3) and the individual affiliates’ strengths to C–. The Chairman of the board and the CEO both resigned.

The new team in charge at Dexia wasted no time in applying for a government bailout. In the context of the Gordon Brown/Angela Merkel/Nicolas Sarkozy rush to save the European banking system, support was immediately assured. It took two forms. First, a capital injection of €6.4 billion, €3 billion from the Belgian State and regional governments, €3 billion from the French government and the Caisse des Dépôts et Consignations and €376 million from the Luxembourg government. Second, a State guarantee covering Dexia’s liabilities up to €150 billion. Belgium provided 60.5%, France 36.5% and Luxemburg 3%. Since Dexia had a US affiliate and a New York banking office, it was also eligible for support from the Fed and immediately borrowed $58.5 billion.

Before the year 2008 was out, Dexia had sold FSA. But downgrading by Moody’s continued, and job destruction began in the very countries whose governments had rushed to Dexia’s support. In early March 2009 a total of 1,500 job cuts were announced, of which more than half were in Belgium and 260 in France. The corporation struggled along the rest of 2009 without new damage, in part due to the Fed’s open discount window. In the spring of 2010, along with the start of the Greek debt crisis and the European banking crisis, job slashing at Dexia began again. Affiliates in Italy (Crediop), in Spain (Dexia Sabadell) and in Slovenia (Dexia Banka Slovensko) were sold, but the group managed to hold on to its activities in Turkey. Most of its profits came from DenizBank and an increasing fraction of total Dexia staff was located in Turkey. The group then enjoyed a year of respite. But the descent began again when the Eurozone crisis worsened brutally in the early summer of 2011.

In September Dexia had to write down the value of its Greek debt and announce a €4 billion loss for the second quarter. On October 4, 2011, its shares fell 22% to €1.01 in Brussels. A run on the bank began, with €300 million withdrawn in one day. On October 10, the Belgian government announced the nationalization of Dexia’s Belgian subsidiary, Dexia Bank Belgium, at a cost of €3.73 billion. A new capital injection by Belgium, France and Luxemburg of €55 billion was announced while discussions started about further divestments and a possible breakup. Painful divestments have taken place since: the sale in Canada of the 50% share in RBC Dexia Investor Services in July 2012, and still worse on September 28: of the prize jewel DenizBank, to the Russian banking group Sberkank. To complete the picture, Dexia is being sued by municipal councils in France and Belgium for the bad loans it made them. The next step is the sale of the Luxemburg affiliate.  The board is still Belgo-French, but Dexia is now almost entirely is a French concern.

Things are basically back to the situation before the 1996 merger, after two capital injections and with huge debts still outstanding. A general assembly is convened for December 21 to approve the merger of Dexia Crédit Local with Banque Postale and Caisse des dépôts et consignations (CDC). A third injection of public money is needed. This time it will be done with the entry of the French and Belgium governments as shareholders, but the ideology of liberalization carefully safeguarded by the European Commission and the European Court of Justice make it unlikely that they will manage the new entity. The political demand for true nationalization under citizen control will be more than ever on the agenda of the Left and the no-global movement.

Francois Chesnais is Emeritus Professor at Paris-Nord University and the Author of La finance mondialisée, La Découverte, Paris, 2004; La finance capitaliste (with de Brunhoff, Duménil, Lévy and Husson), PUF, Paris, 2006; and Les dettes illégitimes, Raisons d’Agir, Paris, 2011.

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