Of Special Interest

30th August 2011

Dexia may struggle without state aid

Dexia had done a great deal to reform itself following the banking crisis. The question remains as to whether it has done enough fast enough to save itself from the pressures of the current markets. Specifically it has problems due to its enormous exposure to PIIGS (Portugal, Italy, Irish, Greece and Spain) sovereign debt and its dependence on the wholesale markets for a high proportion of its funding.

Dexia exposure to PIIGS sovereign debt is calculated by AlphaValue, the equity research company to be equal to 3.5 times the bank's equity capital - therefore essentially 3.5 times Core Tier 1. The bank is also exposed in the US from having made many untapped credit lines to US municipal authorities. These are largely unused at the moment however this could change quite rapidly.

As part of the plan agreed with the European Commission Dexia agreed to reduce its dependency on short term funding from the wholesale markets to 10% of total liabilities. It has made significant progress towards this goal reducing its dependence by almost two thirds from €265bn down to €96bn, equal to around 19% of total liabilities.

Finally there is a question over liquidity. In theory this is not a problem as the European Central Bank has publicly committed to supplying unlimited liquidity. The BUT comes from the fact the ECB must continue to believe the problem is confined to liquidity, that is to say that assets the bank has can be liquidated over time to cover the borrowings for the immediate liquidity needs of the bank.

Currently the market value of many banks is below the book asset value. Dexia is proportionately lower than any other banks of its size and importance, currently trading at below half of its book value. The failure of buyers to come in and buy stock at this knock down price is another indicator of the market concerns that it will face further significant losses.

This article contains a number of figures first quoted in a Wall Street Journal article on the bank. The opinions and interpretation are entirely that of Banking Newslink.