Dexia put on watch for Moody’s downgrades

Dexia Group faces being hit with downgrades to its Paris, Belgium and Luxembourg banking operations as per their standalone bank financial strength (BFSRs), and long-term senior debt and deposit ratings, while its subsidiaries are also likely to be affected.

As standalone institutions, Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale a Luxembourg (DBIL) all face a drop from the C range into D, deeming the banks of “modest financial strength, potentially requiring some outside support at times”.

At their current C- rating, the banks are considered of “adequate intrinsic financial strength” but are expected to be lowered one notch to D+.

The group’s continued reliance on both short-term and secured public funding prompted the move by the ratings agency.

Since 2009, Dexia has faced higher funding costs due to its reliance on public financing following a joint bailout by the Belgian, French and Luxembourg governments on 30 September 2008.

In the latest announced review, Moody’s has thrown into question the ability of the banking group to support itself in the long term.

If its standalone financial strength is lowered, Dexia’s baseline credit assessment could also drop one or two notches, from Baa2 to Baa3 or Ba1. A fall to Ba1 would mean the bank’s baseline credit falling into speculative grade, or junk.

Alongside the review of the institution’s ability to support itself, Moody’s will reassess the long-term senior debt and deposit ratings of the Paris, Belgium and Luxembourg branches of Dexia.

Currently, those are rated at A1, or “upper-medium grade”, putting them at low credit risk but with a “susceptibility to impairment over the long term”.

While Moody’s expected support from the French, Belgian and Luxembourg governments to remain in place, it voiced concern over its structural dependency on public institutions.

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