After being saved in October 2008, Dexia is finally doomed and will end-up split: it is the French part which is the dead body with it huge exposure to local authorities. Its demise will not however induce a spillover on other bnaks: their own exposure to toxic asset will do the job for the one which cannot recapitalize.

1. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Dexia in 2 slides and a few words
I warned about Dexia weeks ago, and during private discussions over the summer I
discussed with a top official in Luxembourg about its demise and breakdown.
Leverage core equity / total assets: 75 x! (36x if using the Basle II Tier 1 capital definition):
so, doomed in a recessionary environment where nearly 50% of loans are with local
authorities that have difficulties to balance their budgets.
The French part of Dexia (formerly Crédit Local de France) is where most the group mess
is coming from: the same ratio is much worse at 259 x!!! Even LTCM was not leveraged
like this…
Dexia BIL (Luxembourg) is rather sound with a ratio of 18 x and its exposure to PIIGS
(EUR 5 billion including EUR 536 million of sovereign debt) is manageable. DEXIA BIL
will be bought by a bank like ING. I guess that Dexia BIL “legacy portfolio” (EUR 10
billion) will be consolidated with the other ones of the group into a bad bank.
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2. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Prima facie, the consolidated “legacy portfolio” does not look so bad: “only” EUR 7.7
billion non-investment grade; well, (1) what is investment grade today may rapidly become
sub- investment grade tomorrow (see Greece) and (2) the EUR 4.1 billion allocated capital
to the “legacy division” is not sufficient to match a 30% loss on the NIG loans.
In 2Q11, Dexia’s portfolio was reduced by EUR 6.8 billion vs. end of March 2011 with a loss
of EUR 4 billion, i.e. ~60% mark-down.
Greece was provisioned for 21% (the IFF* agreement); the final loss will be between 50%
and 75%, so more losses to come.
Short-term Funding need down EUR 47 bn which can only be funded with central banks,
since I guess that Dexia is shut down from the interbank market.
This is a remake of the Irish banks: Dexia successfully passed the 2011 EBA test which was
meant to be much more stringent: a joke I wrote in July.
* Institute of International Finance: the international professional organisation of banks
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3. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Conclusion
After Irish banks last year, Dexia situation exemplify the inadequacy of EBA tests which
are politically motivated. For 3 years, the denial of policy makers regarding Greece default
and banks recapitalization has spurred volatility in markets, not investors: investors are
reacting to hard facts and hate uncertainty and lack of action. Markets do not want words
but acts.
It also shows how the poor quality of blinded European politicians made a limited disease
become metastatic.
After Irish banks last year, Dexia situation exemplifies the inadequacy of EBA tests which
were politically motivated. For 3 years, the policy of denial followed by policy makers
regarding Greece default and banks recapitalization has spurred volatility in markets:
investors are reacting to hard facts and hate uncertainty and lack of action. Markets do not
want words but acts.
Source:
Dexia Group: semi-annual report June 2011
http://www.dexia.com/EN/shareholder_investor/results/Documents/20110408_financia
l_report_2Q_UK.pdf
Dexia CLF: Rapport financier semestriel au 31 juin 2011
http://public-dexia-clf.dexwired.net/DCL/informations-juridiques-
financieres/Documents/semestriel-dcl-2011.pdf
Dexia BIL : Rapport semi-annuel au 30 juin 2011
https://www.dexia-bil.lu/fr/Documents/resultats-financiers/rapport-semi-annuel-dexial-
2011.pdf
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