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Taxpayer can still hope for extra Dexia money, shareholder not

May 31, 2021


Over the next ten years, Belgium will guarantee the residual bank Dexia for almost 40 billion euros. The scheme also provides that the former shareholders will no longer see a euro, but the taxpayer will.

Until 2032, there is a safety net of the Belgian and French taxpayers under the residual bank Dexia. The two governments officially decided this week.

Dexia is the ‘bad bank’ in which all the problem loans of the imploded Dexia were collected in 2011. This was necessary to give the healthy activities, which were revived in the Belgian bank and insurer Belfius, a chance for a new lease of life. It worked. Even in the corona disaster year 2020, Belfius still booked a profit of 532 million euros, a fifth less than a year earlier.

75 billion

Belgium and France together guarantee EUR 75 billion in financing costs at Dexia over the next ten years.

The ‘bad bank’ could only be split off because the government guaranteed that Dexia can continue to pay its bills. That was supposed to reassure financiers to keep the zombie bank afloat, so that Dexia has time to calm down. Without that extra time, the high-loss loan portfolio would have to be liquidated right away.

The state guarantee ran for ten years and had to be extended. In 2019, the European Commission already gave green light for the massive state aid. France and Belgium then worked out the guarantees for the next ten years, until January 1, 2032. The agreement has now been passed through parliament and ratified by the government in Paris and Brussels.

Smaller and more expensive

Belgium and France guarantee 75 billion euros of financing costs at Dexia, which is less than the 85 billion euros of the past ten years. That is enough at the moment. As of May 25, Dexia’s outstanding secured debt amounted to EUR 50 billion.

The state guarantee has not only become slightly smaller but also more expensive.

Luxembourg, which up to now has helped to guarantee a small part, is no longer participating. Of that 75 billion euros, Belgium contributes 53 percent and France 47 percent. At the time of the collapse of Dexia, Belgium was much more vulnerable because there was a lot of Belgian savings in the bank. In France, that link was much smaller.

The essence

  • The Belgian and French governments have finally given the green light for the new state guarantee scheme for Dexia.
  • Over the next ten years, the two governments will jointly guarantee Dexia’s financing needs for EUR 75 billion.
  • The guarantee is 10 billion lower than in the previous scheme, but it is also slightly more expensive.
  • Dexia will continue to pay the same annually as in the previous scheme, but the extra costs for the guarantee will be settled when the residual bank is finally dismantled.
  • This also means that at the end of the day there will be nothing left for the original shareholders of Dexia.

The state guarantee has not only become slightly smaller but also more expensive. Over the past ten years, Dexia has paid 0.05 percent of the guarantees as compensation. The European Commission demanded that this be increased. That was difficult for Dexia, because it drained the cash needed to complete the banking activities slowly and without accidents.

Deferred commission

The compromise is that at the end of the day, when the bad bank is liquidated, Dexia will pay a ‘deferred commission’. The amount of this payment is conditional, but has been constructed in such a way that no money will remain for the old shareholders of Dexia, or the subordinated creditors. It could be up to 27 times higher than the current 0.05 percent.

That’s because after the financial crisis, the European rules for bailing out banks have changed. Shareholders and financiers must absorb the first blow and only then will the government step in to prevent the debris from damaging other, healthy banks.

For this reason, all the cash remaining after the liquidation of Dexia will flow as ‘deferred commission’ to Belgium and France, which have borne the risk of new misery through their state guarantees all along. This confirms once again that the shares of Dexia, which were already silently disappeared from the Euronext Brussels price board, are worthless.

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