By: Dr. Mike Campbell

Franco-Belgian bank Dexia saw its shares slump by 17% on Friday before they were suspended from trading on the Euronext Stock exchange. The financial crisis has seen the value of Dexia shares reduced by two thirds since November of last year.  France and Belgium announced that they would step-in to prevent the bank’s collapse.

The bank is in the process of negotiating a break-up which will see its Luxemburg subsidiary sold to a Qatar based wealth fund for a rumoured €900 million. The government of Luxemburg is likely to be a minority stake holder. The bank holds a little over 1% of Greek sovereign debt at €3.4 billion and has something like €13 billion worth of exposure to Italian debt.

Over the weekend, details of a French, Belgian and Luxemburg bailout package for the troubled bank have emerged. The Belgium government will purchase the Belgian arm of the business for €4 billion. The bank has also been able to secure guarantees from the three nations which back €90 billion in borrowing over the next decade. The lion’s share (60.5%) comes from Belgium with France chipping in 36.5% and Luxemburg guaranteeing the remaining 3%. The bank last received tri-partite state aid in 2008 which was needed to prevent an earlier collapse.

The bank has a global credit risk of €700 billion (more than twice the sum at risk from a possible Greek default) and this explains why it had to be helped. Moody’s has indicated that it may review the Belgian credit rating after this bailout.

Duing the weekend, President Sarkozy and Chancellor Angela Merkel both reiterated that Europe's crisis-hit banks may need to be recapitalised. It seems that a political movement to shore up European financial institutions and draw a line under the sovereign debt crisis may finally be about to emerge, but it does not seem to be something they will rush.