All hands on Dexia

Nice to hear the BBC comment on the plight of Dexia, the Belgian bank this morning, as its share price fell by 40% on rumours of a credit downgrade. This, they and their experts assured us was because Dexia was like another Northern Rock.

Well, up to a point. Dexia is a fairly recent creation formed from the merger of Crédit Communal de Belgique and Crédit Local de France.in 1996. The two predecessor banks were very similar, although they had very different histories, CCB going back to the 1860's and CLF going back to the 1980's.  What they both had in common was the fact that they were state owned and that they both specialised exclusively in lending to local authorities.

After their merger they expanded their focus to Italy and Germany and then to the United States and the rest of Europe, but all the while sticking to their knitting and sticking with credit activities for local government.  This led them to acquire FSA, a US based monoline credit insurer with a track record of wrapping municipal bond issues.  In 2008/9 they incurred large losses in FSA through their exposure to housing finance and also on their exposure to Depfa a German bank that also lent to local authorities.  This led to a bailout.

Which brings us up to the present,where we have a bank that has already been recapitalised, yetr is in deep trouble.  And its main exposure, in fact almost all of its risk assets, are European government entities that have overspent.  That is the real reason for the downgrade, not that you would ever hear that from the BBC.