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After being saved in October 2008, Dexia is finally doomed and will end-up split: it is the French part which is the dead body with it huge exposure to local authorities.

Its demise will not however induce a spillover on other bnaks: their own exposure to toxic asset will do the job for the one which cannot recapitalize.

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  1. 1. Dexia in 2 slides and a few wordsI warned about Dexia weeks ago, and during private discussions over the summer Idiscussed with a top official in Luxembourg about its demise and breakdown.Leverage core equity / total assets: 75 x! (36x if using the Basle II Tier 1 capital definition):so, doomed in a recessionary environment where nearly 50% of loans are with localauthorities that have difficulties to balance their budgets.The French part of Dexia (formerly Crédit Local de France) is where most the group messis coming from: the same ratio is much worse at 259 x!!! Even LTCM was not leveragedlike this…Dexia BIL (Luxembourg) is rather sound with a ratio of 18 x and its exposure to PIIGS(EUR 5 billion including EUR 536 million of sovereign debt) is manageable. DEXIA BILwill be bought by a bank like ING. I guess that Dexia BIL “legacy portfolio” (EUR 10billion) will be consolidated with the other ones of the group into a bad bank. 1
  2. 2. facie, the consolidated “legacy portfolio” does not look so bad: “only” EUR 7.7billion non-investment grade; well, (1) what is investment grade today may rapidly becomesub- investment grade tomorrow (see Greece) and (2) the EUR 4.1 billion allocated capitalto the “legacy division” is not sufficient to match a 30% loss on the NIG loans.In 2Q11, Dexia’s portfolio was reduced by EUR 6.8 billion vs. end of March 2011 with a lossof EUR 4 billion, i.e. ~60% mark-down.Greece was provisioned for 21% (the IFF* agreement); the final loss will be between 50%and 75%, so more losses to come.Short-term Funding need down EUR 47 bn which can only be funded with central banks,since I guess that Dexia is shut down from the interbank market.This is a remake of the Irish banks: Dexia successfully passed the 2011 EBA test which wasmeant to be much more stringent: a joke I wrote in July.* Institute of International Finance: the international professional organisation of banks 2
  3. 3. Irish banks last year, Dexia situation exemplify the inadequacy of EBA tests whichare politically motivated. For 3 years, the denial of policy makers regarding Greece defaultand banks recapitalization has spurred volatility in markets, not investors: investors arereacting to hard facts and hate uncertainty and lack of action. Markets do not want wordsbut acts.It also shows how the poor quality of blinded European politicians made a limited diseasebecome metastatic.After Irish banks last year, Dexia situation exemplifies the inadequacy of EBA tests whichwere politically motivated. For 3 years, the policy of denial followed by policy makersregarding Greece default and banks recapitalization has spurred volatility in markets:investors are reacting to hard facts and hate uncertainty and lack of action. Markets do notwant words but acts.Source:Dexia Group: semi-annual report June 2011 CLF: Rapport financier semestriel au 31 juin 2011 BIL : Rapport semi-annuel au 30 juin 2011 3