Wallooning debts

Belgium’s bill for bailing out Dexia could be much higher than what meets the eye. After a weekend of frantic negotiations, Brussels is to pay euro 4 billion to take the vanquished lender’s Belgian assets into public ownership. If that was it, the direct costs to the state would be only a per cent of GDP.

On first glance, it might seem Belgium is getting a bargain, as Dexia Bank Belgium’s book value was euro 7.9 billion in June. But, Belgian accounting rules allow Dexia to dodge marking so-called available for sale (AFS) assets to the market. Including these losses, DBB’s book value was euro 5.7 billion in June. Given the mayhem over the past three months, the current mark-to-market value could be less than what the Belgian government is paying.

Then, there’s the question of whether the Dexia rump, in which the Belgian state still holds a 5.7 per cent stake, has enough capital. The plan is to sell its Turkish, Luxembourg and French municipal operations. After the disposals, it would still have euro 60 billion of risk-weighted assets. That would require at least euro 6 billion of capital to create a 10 per cent core Tier-I buffer against losses.

Part of this will depend on whether Dexia can sell assets above the book value. But, a lot will depend on whether Belgium is allowed to keep sweeping AFS losses under the carpet. Even as the new Basel rules say no, there’s always the possibility of fudges. If, at the end of the process, there is a capital hole, it’s unclear how Belgium and France would plug it. But, imagine for the sake of argument, Brussels faces another euro 3-billion bill.

Finally, Belgium is on the hook for guaranteeing 60.5 per cent of Dexia’s funding for 10 years — or euro 54 billion in total. Tot it all up and the total cost to the Belgian taxpayer, in a real disaster, could be 17 per cent of GDP – on top of last year’s level of 96 per cent.

No wonder, Moody’s is examining whether to downgrade the country’s sovereign debt and Belgian 10-year debt yields have jumped from 3.6 per cent to 4.1 per cent in a week.