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Dexia commits to clean-up, France, Belgium ready to act

The logo of Belgian-French bank Dexia is seen in central Brussels
The logo of Belgian-French bank Dexia is seen in central Brussels

By Philip Blenkinsop

LUXEMBOURG (Reuters) - Franco-Belgian financial group Dexia vowed on Tuesday to clean up its balance sheet, with France and Belgium poised to act, after concerns about its exposure to Greece and a Moody's warning about its liquidity pummelled its shares.pummeled

The bank summoned board members for a emergency meeting from Monday evening into the early hours of Tuesday.

Dexia said afterwards that it was weighed down in the current environment by the size of its assets for sale, including 95 billion euros ($126 billion) of bonds.

It added that chief executive Pierre Mariani had been charged with preparing measures to resolve such structural problems that were harming its operations.

Dexia's statement came shortly after the conclusion of a meeting of euro zone finance ministers in Luxembourg, including those of Belgium and France, both shareholders in the group.

"The two governments are following the situation and will intervene if necessary," Belgian finance minister Didier Reynders told reporters as he departed the meeting.

The mid-tier bank has one of the largest exposures to Greece among overseas lenders and has been at the center of media speculation in recent weeks that it will split or will need another bailout, potentially from taxpayers.

According to a source familiar with the situation, Dexia's shareholders were keen to avoid a capital increase, but the group was likely to put a part of its French municipal lending unit Credit Local for sale.

Alex Koagne, analyst at Natixis in Paris said there could not be any demerger until capital was pumped in.

"An injection is needed so the bank can withstand losses on toxic assets," he said.

He estimated Dexia needed 5 billion euros in additional capital to have a 9 percent common equity Tier 1 ratio under Basel III rules.

Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis is not resolved.

Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit, Deutsche Bank, Lloyds, Societe Generale and Barclays each face a deficit of over 7 billion euros under its stressed scenario.

If banks are unable to raise the capital privately, government ownership of the sector could jump to 22 percent from 7 percent now, JPMorgan analyst Kian Abouhossein said in a note.

European bank stocks fell on average by 2.8 percent on Monday. Dexia's stock was the weakest in that sector, dropping 10.2 percent.

Dexia, which received a 6 billion euro ($8 billion) bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.

Dexia's market capitalization is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits. capitalization The company has taken a 338 million euro hit to cover a 21 percent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.

But with market prices indicating investors could suffer a loss of 50 percent or more, Dexia's Greek bill could be more than 1 billion euros more.

Dexia came unstuck when short-term credit dried up in the depths of the 2008 financial crisis, since a large proportion of its long-term lending to public authorities was financed by short-term borrowing.

Moody's said on Monday Dexia had experienced further tightening of its access to market funding and that it could cut its A3 long-term rating. ($1 = 0.753 Euros)

(Additional reporting by Julien Toyer in Luxembourg, Steve Slater, Sophie Sassard in London, Julien Ponthus and Lionel Laurent in Paris; Editing by Rex Merrifield and Erica Billingham)

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