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Embattled Dexia Just the Tip of the Iceberg?

As the French and Belgian governments race towards a second rescue for stricken financial group Dexia, fears that the Franco-Belgian group is just the first of many banks in need of aid are intensifying.

France and Belgium
CNBC.com
France and Belgium

Dexia’s board will meet in Paris on Saturday to vote on a break-up plan for the group, Reuters cited sources as saying. It added France and Belgium are expected to finalize the plan on Thursday.

Meanwhile the Luxembourg government – Dexia’s three main business units are in Belgium, France and Luxembourg – has said it will take a minority stake in the bank, adding that an international group of investors is ready to buy a majority stake in Dexia’s Luxembourg arm.

The Belgian and French governments have said they will protect Dexia account holders beyond the existing state guarantee of 100,000 euros. But analysts warn this will come at a cost. Dexia shares were sharply lower, down some 9 percent in midday trade.

“For Dexia, the governments promise that “no client will lose a single euro cent”. Who will be paying for all of this? Whatever the scheme is to stabilize Dexia, it has to cost some governments some money,” Carl Weinberg, Chief Economist at High Frequency Economics said in a note to clients.

“That money will have to be found either by reducing spending elsewhere in the nations’ public finances or by borrowing more from taxpayers,” he said.

Weinberg warned that Dexia was "just the tip of the iceberg".

“BdF (the French central bank) President Noyer may insist that Dexia’s experience is no prelude to the failure of other banks. We respectfully disagree,” he said.

Fears of another, broader banking collapse appeared to be taking hold among EU executives as well.

European Commission President Jose Manuel Barroso on Thursday called for a coordinated recapitalization of banks, and Joaquin Almunia, the EU’s antitrust chief and former head of EU monetary affairs said recapitalization needed to be promoted to ensure the viability of banks.

“As a last resort, public support should be considered again,” Reuters quoted Almunia as saying.

Weinberg warned that there was no resolution to the financial crisis in the euro zone that does not increase the fiscal deficits of its countries.

“There is no resolution of Euroland’s financial crisis that does not further depress economic growth any level presently imagined,” he said.