France, Belgium set to finalise Dexia break-up

BRUSSELS Sat Oct 8, 2011 6:30pm EDT

BRUSSELS Oct 9 (Reuters) - France and Belgium were set finalise the break-up on Sunday of Dexia , the first bank to fall victim to the euro zone sovereign debt crisis, with global credit risk exposure of 512 billion euros ($691 billion).

Dexia, whose board was also due to meet on Sunday, was forced to seek government help this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.

Belgian caretaker Prime Minister Yves Leterme told a news conference on Saturday evening that final negotiations between France and Belgium would take place in Brussels on Sunday.

Finance Minister Didier Reynders said Belgium had been in touch with France, Luxembourg and the European Commission.

"I hope tomorrow we will reach our goals," he said.

The Franco-Belgian bank's near collapse stoked investors' anxieties about the strength of European banks and coincided with growing talk about coordinated EU action to recapitalise banks across the continent.

The burden of bailing out Dexia led ratings agency Moody's to warn Belgium late on Friday that its Aa1 government bond ratings may fall.

Some investors view the response to Dexia's woes as a test of European governments' ability to take decisive action to rescue banks if the euro zone debt crisis worsens.

French President Nicolas Sarkozy was due to meet German Chancellor Angela Merkel on Sunday in Berlin to thrash out differences on how to use the euro zone's financial firepower to salve a sovereign debt crisis that threatens the global economy.

Dexia's overhaul will see its French municipal financing arm split from the group and merged with French state bank Caisse des Depots and Banque Postale, the post office's banking arm.

The Belgian government wants to nationalise Dexia's largely retail banking business in Belgium.

Healthy units, such as Denizbank in Turkey, will be sold.

A 'bad bank' supported by state guarantees will hold 95 billion euros in bonds, including 12 billion euros of sovereign debt of weaker euro zone periphery nations.

Including 7 billion euros of securities linked to U.S. mortgages, France and Belgium may need to provide guarantees to cover up to 200 billion euros of assets, which would be more than 55 percent of Belgian GDP.

The key issues for Sunday's talks will be how to divide up the 'bad bank' assets, how much Belgium should pay to nationalise Dexia's Belgian banking business and whether others, such as Belgium's regions, would be involved in its purchase.

Dexia's shares have been suspended since Thursday afternoon and have lost 42 percent since last Friday.

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