Greek Debt Crisis Leads To Dexia Bank Failure

Oct 11, 2011
Originally published on October 11, 2011 5:32 pm
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The European bank Dexia couldn't wait for a grand Eurozone bargain. In the past couple of days, Dexia has been nationalized by Belgium and bailed out by France, and oil-rich Qatar is looking to buy some pieces of it. This marks the demise of a bank that just a few months ago, in European Union stress tests, was rated the 12th safest bank in the E.U.

Dexia is the first bank to fail as a result of the Greek debt crisis. And it was evidently sunk by its holdings of European sovereign debt, especially Greek bonds.

Reporter Stanley Pignal has written about this for the Financial Times. He's in Brussels and joins us now.

And first, Stanley Pignal, how big a development was the French and Belgian rescue of Dexia?

STANLEY PIGNAL: It's a big development in that it's the first bank which is victim of the Eurozone debt crisis. Dexia is not a household name because it loans mainly to local governments. So it doesn't loan to businesses or to consumers, but it does have a huge balance sheet, nearly $700 billion. So that's more than the whole Greek financial system, for example, or all the Irish banks that got bailed out a couple of years ago.

SIEGEL: Well, did Dexia get into such trouble through unusually imprudent investing, or were its practices similar to those of other Europe banks?

PIGNAL: This is actually the second bailout for Dexia. In 2008, it had to be bailed out after exceptionally imprudent investing, including in U.S. subprime mortgages. This time around, it was basically dealing with the legacy of the past, and it was trying to do what it could to get back into safer waters. But with the Eurozone debt crisis in the past year, it basically ran out of time.

SIEGEL: Yeah, that was the past. This is now. And if the 12th most secure bank in Europe just collapsed, does that mean that several more bank collapses are in store?

PIGNAL: What happened with Dexia is actually a little bit unusual, and it comes back to the fact that Dexia is an unusual bank. They actually had plenty of capital, which is what these stress tests were designed to test. What it didn't have was access to funding, and a little bit like Bear Stearns in 2008. It needed a lot of short-term capital. And because of the Eurozone debt crisis, banks got increasingly nervous about lending to each other, and so the money just ran out for Dexia.

SIEGEL: Well, Qatar also figures in this story, looking to take over some of Dexia's operations. Is Qatar, or for that matter, other oil-rich countries, seen as part of a broader solution to Europe's banking problems?

PIGNAL: Well, the IMF has said that European banks need 200 billion euros. That's about 270 billion U.S. dollars in extra capital. They just don't have enough capital. Now, that money can either come from private investors in Europe, including the banks themselves. It can come from European governments who are clearly discussing it, or it can come from outsiders.

Now, the problem is that the banks don't have a lot of money, and the governments right now don't have a lot of money because of the bailouts. So something like an outside investor, for example, oil-rich Qatar, could be a solution.

SIEGEL: As we learned painfully during the mortgage-backed securities crisis, banks that hold securities that may go into default buy insurance, credit default swaps from other banks or insurers. And if there's a wave of defaults, those lenders then can be in trouble. Do we know who has been insuring risky Greek bonds or Italian bonds of sovereign debt that's held by European banks?

PIGNAL: Well, the big exposure really still lies with European banks. And how bad the situation gets for the banks largely depends on the result of political decisions in the next couple of weeks. If all the banks have to suffer is a haircut, as investors call it, on Greek bonds, that's fine. They won't enjoy it, but they can cope with it.

If, however, they are starting to make losses on their Italian bonds, for example, then many more European banks are going to start running into trouble.

SIEGEL: Well, Stanley Pignal, thank you very much for talking with us.

PIGNAL: Thank you.

SIEGEL: Stanley Pignal, a reporter for the Financial Times newspaper, spoke to us from Brussels. Transcript provided by NPR, Copyright NPR.