Vice President of Analysis Peter Zeihan discusses the collapse of the Franco-Belgian bank Dexia and examines its effects on the European debt crisis.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. The Franco-Belgian bank Dexia started collapsing Oct. 4, ushering the latest chapter of the nearly 2-year-old European financial crisis. Considering that Dexia is on the list of the top 50 global financial institutions, it is worth examining what happens during a bank bailout and shutdown process and applying that to the Dexia situation. In minor cases, a cash infusion from a government is usually sufficient to hold the bank over until such time that normal economic growth can help the bank regenerate its finances. Growth has been middling in Belgium since 2008, and Dexia simply hasn't been able to get out from under the problems caused by its non-performing assets. In moderate cases, governments come in and take a percentage share of ownership of the bank, putting their own representatives on the bank's board and forcibly restructuring it. This has already been done for Dexia, too. In the aftermath of that 2008 bailout, Dexia became majority-owned by various governments in France and Belgium. But the restructuring procedures have not followed what we would consider to be a standard course. Normally, there are major changes at the top and policies are adjusted all throughout to make sure that the sort of indiscretions that led to the bank problems in the first place don't happen again. Dexia, however, is not a normal consumer or business bank. Instead, much of its business comes from supplying credit to various parts of the Belgian state apparatus. So when these entities took greater control of Dexia back in 2008, instead of encouraging Dexia to engage in more lending to private enterprise, which might actually regenerate its loan book, they instead encouraged Dexia to invest more in their dead issuances, allowing them to run larger deficits than they would've been able to otherwise. Somewhat ironically, the last bailout actually only reinforced the bad policies that had gotten Dexia into trouble the first place. The final option is some sort of dissolution —typically the bank is broken up into pieces. The good pieces typically find eager buyers who are willing to pay more or less market value. The bad pieces, however, have to be bundled into some sort of bad bank where ultimately they are sold off piecemeal at pennies on the dollar. This is really the only option that is left for Dexia. But there are several problems even with this strategy. First, any good asset sales right now in the current environment are not going to be bringing what we would consider full market value. Europe is basically in a mild recession at present — it could get a lot worse because of the financial crisis — and European banks have so far proven unwilling to lend much money to each other, much less go out and grab assets from a failed bank and one of Europe's most debt-heavy states. Which means that the losses that the state is going to absorb when this is all resolved are going to be much higher than they would normally be. Second, Belgium doesn't have the money to absorb the losses of the bad bank right now anyway. Belgium already has a national debt of 100 percent of GDP and is having problems raising capital under normal circumstances — much less the sort of large infusion that would be required for a bailout of Dexia. Additionally, under normal circumstances, Belgium would turn to Dexia for financing — that's obviously not an option anymore, which means, at least in the initial stages, the financial burden is going to be carried by France and France alone — something which will cost Belgium more in the long run. Third, considering that Dexia is leveraged by a factor of 60-1 (for comparison, Lehman Brothers was only 30-1) and because it's already 35-percent owned by the state, this is a bank that is going to be suffering far greater losses than normal because it's extraordinarily damaged. Dexia has over 500 billion euros in assets and 20 billion of those are government debts of Portugal, Italy and Greece. So let's assume for the moment that the bailout only costs the Belgian government about 30 billion euros — which we see as fairly conservative. That alone would be sufficient to increase Belgium's national debt load to 110 percent of GDP, putting them within easy reach of where Italy is right now. Fourth, Dexia is a leading source of financing for the Belgian government – it's not there anymore. Belgium is going to have to find another way to raise money on international markets — not just to cover the bailout but to cover its normal activities. That's becoming increasingly difficult for states that have high debt and low government competency, and Belgium is certainly in that list. It's now been over 480 days since Belgium has had a government, and last month its prime minister decided that he was going to quit. Added together, Belgium is being pushed very very close to needing a state bailout of its own.