Dexia’s future uncertain as Moody’s downgrade looms

Franco-Belgian bank Dexia has been placed on review for a downgrade by ratings agency Moody’s, signalling further bad news for the bank which is already combating heavy exposure to Greece.

Moody’s is to reassess its standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group’s three main operating entities: Dexia Bank Belgium, Dexia Credit Local and Dexia Banque Internationale à Luxembourg.

The BFSRs of these three entities are currently scored as Ba2 on Moody’s long-term scale. The long-term debt and deposit ratings and the short-term debt ratings of these subsidiaries are aligned at A3 and Prime-1 respectively.

Dexia has come under closer scrutiny after the Greek government admitted it will miss key deficit reduction targets, increasing the likelihood of a Greek default.

According to a statement from Moody’s, the agency’s review has been prompted by its concerns about “further deterioration in the liquidity position of [Dexia] group in light of the worsening funding conditions in the wider market.”

The bank, majority owned by the French, Belgian and Luxembourg governments and the Caisse des Dépôts et Consignations, the French sovereign wealth fund, received €6.4bn aid from France and Belgium in 2008.

In July 2011 Moody’s said that it continued to have concerns about Dexia Group’s reliance on short-term funding and the consequent liquidity gaps that render it vulnerable to adverse market conditions and worsen market perception of its creditworthiness.

According to Moody’s, Dexia has experienced further tightening in its access to market funding since July.

On a more positive note, Moody’s said it expected Dexia to “benefit from very high systemic support from France, Belgium and Luxembourg.”

The ratings agency has also taken note of comments made on 27 September 2011by Dexia’s chairman of the board of directors, Jean-Luc Deheane, which were published on the bank’s website. According to the statement, Dexia will examine various strategic hypotheses.

During Moody’s review it will assess the effect of any change in the bank’s strategy on Dexia’s business and risk profile and the systemic support available to the various group entities over the longer term.

Deheane was also keen to underline the bank’s “stable nature of its shareholding and solid capital base, as testified by its Tier 1 ratio (11.4%) and Core Tier 1 ratio (10.3%),” in the statement published online.

So far in 2011 Dexia has been attempting to improve its long-term funding programme for 2011 and raised €18.4bn of long-term resources as at 9 September 2011. The group has also undergone a rigorous asset disposal programme, selling off almost €24bn of assets, including almost all of its financial products portfolio.

Dexia’s main lines of business include retail, commercial and private banking services in Belgium, Luxembourg and Turkey. It had €86.4bn under management as at 31 December 2010.

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