Talks continue to save Dexia

France and Belgium thrashed out plans today to break up stricken bank Dexia and divide its "bad bank" assets to preserve the financing of hundreds of towns in both countries and avoid a deepening of the euro zone debt crisis.

Dexia, whose board is likely to meet tomorrow, was forced to seek government help earlier this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.

The Franco-Belgian bank's near collapse has added to investors' worries about the solidity of European banks and has coincided with increased European Union talk about coordinated action to recapitalise banks across the continent.

The burden of bailing out Dexia also led ratings agency Moody's to warn Belgium late last night that its Aa1 government bond ratings could fall.

France and Belgium have guaranteed Dexia's financing, paving the way for a new rescue for the bank, which is struggling to wind down billions of euros in toxic assets accumulated during an overambitious expansion plan.

But there were signs that the details of the rescue were proving troublesome, as a Dexia board meeting originally scheduled for today slipped back to tomorrow.

Still, a source close to the talks was confident the bank's future would be determined before the opening of markets on Monday morning.

"Dexia's funeral will be announced on Sunday," the source said, asking not to be identified.

Belgian caretaker prime minister Yves Leterme and French counterpart Francois Fillon spoke by telephone earlier today, and financial experts from both countries were meeting in Paris to sort out the details of Dexia's salvage.

Finance ministers Didier Reynders and Francois Baroin were due to speak early in the evening. The Belgian government and the Flemish regional government were also both expected to hold cabinet meetings later in the day.

Some investors view the response to Dexia's woes as a test of European governments' ability to take decisive action to rescue banks if the eurozone debt crisis worsens.

"The need to rescue Dexia is symbolic of the uncertainty that characterises the banking sector," said Eric Galiegue, president of Valquant, an independent research firm. "Who would have imagined that a bank so linked with European construction would end up being dismantled?"

French president Nicolas Sarkozy was due to meet German chancellor Angela Merkel tomorrow in Berlin amid reports of differences on how to use the euro zone's financial firepower to counter a sovereign debt crisis that threatens the global economy.

There were also clashes within Belgium, between the federal government and its regions, over Dexia's fate, with the central government favouring a nationalisation of its Belgian retail unit but facing stiff opposition from regions who fear the loss of €1 billion they contributed to an initial Dexia rescue.

An agreement may have been found late yesterday, under which the federal government would agree to let regions back into the capital of DBB, Dexia's Belgian retail lender, through a rights issue at a later stage, Belgian newspaper L'Echo said.

Citing no sources, L'Echo also said several international banks, including Deutsche Bank, Rabobank , Credit Mutuel and BBVA, had "shown interest in DBB."

Sources close to the negotiations said the federal and regional governments still had not reached a deal by midday today, but that they were getting close.

Assuming those differences in Belgium are resolved, Paris and Brussels still need to agree on how much each will contribute to a broader Dexia overhaul.

That overhaul will probably see the sale of healthy units such as Denizbank in Turkey and a takeover of its French municipal finance arm by two French state banks, including Dexia's largest shareholder, Caisse des Depots and Consignations, which has a 17.6 per cent stake.

Dexia's shares have been suspended since Thursday afternoon and are down 42 per cent since last Friday.

Reuters