October 8, 2011 / 10:05 AM / 6 years ago

UPDATE 1-Dexia board set to meet as break-up looms

* Dexia board meeting expected to meet on Sunday

* Moody's warns Belgium of possible bond ratings downgrade

* France, Belgium arguing over who will pay to salvage Dexia

* Dexia is first European bank meltdown amid euro zone crisis

By Christian Plumb and Philip Blenkinsop

PARIS/BRUSSELS, Oct 8 (Reuters) - France and Belgium are expected to finalise plans this weekend to break up Dexia , which helps finance hundreds of towns in both countries and became the first European bank to fall victim to the euro zone crisis.

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

The bank's implosion has added to investors' worries about the solidity of European banks and has coincided with increased European Union talk about coordinated action to recapitalise banks across the continent.

The burden of bailing out Dexia also prompted Moody's to warn Belgium late on Friday that its credit rating could fall.

The ratings agency also cited the prospect of higher funding costs and weak economic growth as reasons for putting Belgium's Aa1 government bond ratings on review for possible downgrade.

France and Belgium have guaranteed Dexia's financing, paving the way for a new rescue for the bank, which is struggling to wind down billions of euros in toxic assets accumulated during an overambitious expansion plan.

But there were signs that the details of the rescue were proving troublesome, as a Dexia board meeting originally scheduled for Saturday slipped back to Sunday.

Still, a source close to the talks was confident the bank's future would be determined before the opening of markets on Monday morning.

"Dexia's funeral will be announced on Sunday," the source said.


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 eurozone debt crisis worsens.

"The need to rescue Dexia is symbolic of the uncertainty that characterises the banking sector," said Eric Galiegue, president of Valquant, an independent research firm. "Who would have imagined that a bank so linked with European construction would end up being dismantled?"

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

There were also clashes within Belgium, between the federal government and its regions, over Dexia's fate, with the central government favouring a nationalisation of its Belgian retail unit but facing stiff opposition from regions who fear the loss of 1 billion euros they contributed to an initial Dexia rescue.

An agreement may have been found late on Friday, under which the federal government would agree to let regions back into the capital of DBB, Dexia's Belgian retail lender, through a rights issue at a later stage, Belgian newspaper L'Echo reported.

"This Belgian-Belgian arrangement should allow to finalise this weekend the rescue of Dexia by Belgium and France," L'Echo said on its website on Saturday.

Citing no sources, L'Echo also said several international banks, including Deutsche Bank , Rabobank , Credit Mutuel and BBVA , had "shown interest in DBB."

Assuming those differences in Belgium are resolved, Paris and Brussels still need to agree on how much each will contribute to a broader Dexia overhaul.

That overhaul will probably see the sale of healthy units such as Denizbank in Turkey and a takeover of its French municipal finance arm by two French state banks, including Dexia's largest shareholder, Caisse des Depots and Consignations, which has a 17.6 percent stake.

Belgian and French financial experts began talks on Thursday, but politicians from each country have yet to enter discussions.

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

The bank's meltdown has worried some of its Belgian depositors, who earlier this week overwhelmed the bank's telephone helpline.

On a broader level it has heightened concern about other European banks' solidity, though Societe Generale Chief Executive Frederic Oudea told Reuters in an interview on Friday that Dexia's circumstances were specific to itself, and "people should not expect further problems with the system".

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