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London (CNN) – At the height of the credit crunch the Franco-Belgian bank Dexia became one of the first eurozone banks to be bailed out. Three years on, it may need another helping hand.
This is largely thanks to some $21 billion worth of sovereign bonds Dexia holds on its books: debt issued by Greece, Italy and other peripheral eurozone countries, whose obligations are becoming riskier by the day as the region’s financial crisis intensifies.
Dexia posted its biggest loss ever in the second quarter, coming in at a whopping $5.5 billion after the bank wrote down the value of its Greek holdings. The result: the company’s stock has plunged 50% in the past six months. Newspapers including the Financial Times say Dexia’s management is considering setting up a ‘bad bank’ to unburden itself of the risk.
To write down or not to write down is now the question.
Reports by financial newswires such as Bloomberg News suggest that Dexia, alongside some other French banks, only wrote down a fifth of the value of their shrinking securities instead of fully reflecting their present, lower market worth today.
When agreeing to grant Greece a second aid package, eurozone leaders told holders of Greek debt to take a 21% ‘haircut’ (or write down) on the value of their investment, ensuring the private sector take some of the burden if it wished to prevent a full Greek default.
However, experts and markets alike are now pricing in a 50% haircut, which means at some point Dexia and others will have to take another knife to their balance sheets.
The question is: Can Dexia afford to do this?
Dexia is a significant lender to municipalities across the eurozone and beyond.
As such, it plays a crucial function of lending to local governments everywhere. Its commitments in the U.S. include $14 billion of agreements to buy back some municipal bonds from investors if they want out.
It holds about $1.7 billion of Greek bonds that expire before the end of this decade. Bloomberg says it has $3.6 billion in bonds for sale but the cost of writing them down would be equal to more than half of Dexia’s total market value (not to mention the increasing cost of insuring such debt).
These are some of the reasons why ratings agency Moody’s fired a warning shot this week, putting Dexia’s rating on review for a possible downgrade.
Yet the main reason Dexia is facing troubled times is largely thanks to an interbank lending crisis akin to the one that brought the U.K’s Northern Rock and Royal Bank of Scotland to the brink.
Tightness in the credit markets makes it difficult for firms like Dexia to lend out for the long term and refinance those outstanding loans in the short term markets.
Dexia, in fact, relied on $45 billion worth of European Central Bank funding in June, according to Bloomberg.
Dexia isn’t the only lender to be burned by the eurozone’s sovereign debt crisis.
Today Germany’s Deutsche Bank, one of the region’s more robust banks, conceded it would miss this year’s profit forecast thanks to impairments related to its Greek debt holdings.
Times may be more dangerous for Dexia than Deutsche. But broadly speaking what’s changed now from 2008 is now the eurozone’s governments have bailed out their banks, it’s the countries who need bailing out themselves before they can serve up more sustenance to their lagging lenders.
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