Why Dexia’s bailout is a big mistake
As for the Belgian government’s solvency, this could well be the straw that breaks the camel’s back. Belgium’s credit rating was already put on negative watch by Moody’s on Friday; a downgrade looks inevitable. France too is under pressure. A 40 per cent write-down of the assets held by the new “bad bank” could boost Belgium’s debt to GDP ratio from around 100 per cent to 112 per cent, according to Independent Strategy. It is easy to devise scenarios under which the Belgian national debt shoots up even higher, tipping that already troubled nation into a group that includes Mediterranean nations such as Greece or Italy.
The danger is that when investors digest the magnitude of the Dexia costs to France and Belgium, and extrapolate to other banks across the Eurozone, they will suddenly realise that the potential size of the bailouts could be much greater than the usual numbers suggest. The bailout, far from “ring-fencing” Dexia, could actually trigger increased contagion. Will it really only cost €200bn or so to recapitalise Eurozone banks to allow them to survive regardless of how bad the sovereign debt crisis becomes? cityam
As for the Belgian government’s solvency, this could well be the straw that breaks the camel’s back. Belgium’s credit rating was already put on negative watch by Moody’s on Friday; a downgrade looks inevitable. France too is under pressure. A 40 per cent write-down of the assets held by the new “bad bank” could boost Belgium’s debt to GDP ratio from around 100 per cent to 112 per cent, according to Independent Strategy. It is easy to devise scenarios under which the Belgian national debt shoots up even higher, tipping that already troubled nation into a group that includes Mediterranean nations such as Greece or Italy.
The danger is that when investors digest the magnitude of the Dexia costs to France and Belgium, and extrapolate to other banks across the Eurozone, they will suddenly realise that the potential size of the bailouts could be much greater than the usual numbers suggest. The bailout, far from “ring-fencing” Dexia, could actually trigger increased contagion. Will it really only cost €200bn or so to recapitalise Eurozone banks to allow them to survive regardless of how bad the sovereign debt crisis becomes? cityam