Troubled bank unit involved in Ontario P3s

A large part of the troubled assets of Dexia (the failing Franco-Belgian bank) are on the balance sheet of Dexia Credit Local, a French unit of the bank. Bloomberg reports the unit has 21 billion of Greek, Italian, Portuguese, Spanish and Irish sovereign debt.

Dexia Credit Local is also the unit of the bank involved in all four of the bank's public private partnership (P3) projects in Ontario. The Ontario P3s include three hospitals and a highway.

Standard & Poor's downgraded the credit ratings on three Dexia units, including Dexia Credit Local, on Thursday, citing the group's limited access to wholesale funding markets. The ratings are on credit watch with "developing implications", S&P said.

The French, Belgian, and Luxembourg governments stepped in over the weekend. Belgium will nationalize the healthy Belgian part of the bank and other parts will be sold off (e.g. Canada's RBC is in very advanced talks to buy out Dexia from their jointly owned company "RBC Dexia Investor Services"). The business listed on the stock market will become a 'bad bank' that eventually will be wound down, possibly leaving little for stockholders. (This, in turn, may occasion lawsuits from the stockholders, as has happened in the past.)

The three countries will also guarantee as much as 90 billion euros of interbank and bond funding for 10 years for Dexia and the Dexia Credit Local unit.

As a result of the Dexia bailout, the credit rating agency, Moody's, has warned that it may downgrade Belgian government bonds (already Belgium is forced to pay almost 2% more than Germany for ten year bonds). There are also concerns that France's AAA rating may fall under threat.

Bailing out Dexia on an urgent basis was critical to stopping the crisis from spreading to other banks. But more trouble may come regardless. Alastair Ryan, an analyst at the UBS bank, believes European governments could end up owning 40% of the banking sector if €200 billion is needed to prop up banks, as estimated by the International Monetary Fund.

The European Union is meeting October 23 to put together a more comprehensive plan to save the banks. But the markets are wondering if more urgent bail-outs, like Dexia's, will be needed.

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