French Finance Minister, Francois Baroin, is seeking a European solution for the financial bailout of Dexia rather than a Franco-Belgian solution, according to his statement earlier today.
That is a change of approach and strategy but one that may also change the European landscape if and when implemented.
It was previously thought that both the French and Belgian governments would assume the toxic assets to keep Dexia from going into bankruptcy but this sheds an entirely different light on the situation.
It also makes one wonder how many more European banks are at risk and need serious recapitalization.
Only three months ago Dexia was one of 91 European banks that passed the “stress test” but is now in financial trouble. How many more will follow and is Mr. Baroin’s idea of a European solution pointing towards risks to come?
Should a European solution be applied than such may mean that the European Financial Stability Fund (EFSF) will be expanded.
It could also mean that the current European Stability Mechanism (ESM) will be expanded or will take on a very different role going forward.
The third option is the issuance of Eurobonds, a topic that has been discussed in the past but seems far removed from reality given the current structure of the Eurozone and the financial peril some members are facing.
The timing for seeking a European solution rather than a national solution to a lingering financial problem may seem appropriate at this time but the markets doubt whether Europe can act fast enough to calm the storm.
Mr. Baroin’s statement also raises the question whether France can afford a bailout of Dexia and what that would mean to their Sovereign debt rating which would be under pressure and probably face a downgrade.
Belgium, the second owner of Dexia, is not in a situation to contribute to the solution given that the country basically has no official government and Mr. Yves Leterme is primarily acting as Prime Minister but without the powers to enforce a participation in a joint Franco-Belgian bailout.
Mr. Baroin understands that his country is at risk which is probably the reason he will try to convince Europe to join forces and let the EFSF and/or ESM lead the bailout efforts in case other European financial institutions follow suit in the next months to come.
Written by Nick Doms © 2011, all rights reserved.
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