France, Germany Could Face Downgrade: Southwest Securities' Grant
Special to CNBC.com
Belgium's and France's plan to guarantee the financing of struggling bank Dexia will earn them a ratings downgrade and the contagion can spread to Germany, Southwest Securities Managing Director Mark Grant warned Wednesday.
He told CNBC the markets may not realize the extent of this situation.
"Belgium and France are very likely to get downgraded, and in short order, because of the [Dexia] action," he said. "You’re going to see, in my opinion, huge contagion from the other big French banks, the German banks.
"Dexia is involved right up to their eyeballs with all the other big international banks, and I think this is going to be incredibly problematical and I don’t think the markets at this juncture have focused at all on how important this is."
The French-Belgian bank has proposed putting assets worth over $238.9 billion in a so-called "bad bank" that would be backed by France and Belgium. The nations said Tuesday they would guarantee financing.
Grant called Dexia "a very complicated bank, primarily involved in municipal funding."
"One of the big issues is going to be the derivative contracts and what Belgium and France are actually going to take on in terms of the bad bank, which they’re talking about 180 billion [euros], and whether they’re going to honor the guarantees of Dexia besides taking on the liabilities and the bad bank."
"This is going to have a dramatic effect, in my opinon, on the credit of France," he added.
Struggling banks like Dexia "are going to drag down the sovereigns," he warned. He said Tuesday's late-day stock rally on a report that European Union finance ministers are looking at ways of recapitalizing financial institutions was like "expecting Santa Claus to come down the chimney."
With any kind of recapitalization, he said, the question is: "Who’s going to pay?"
"Well, who is paying is the sovereign [nation]. Sovereigns get downgraded," he said, and "in the end, France [and] Germany itself will get downgraded because they don’t have the kind or the size of economy to support all of this for Europe."