First domino?

Shares in franco-Belgian bank Dexia hit a record low on Tuesday morning amid concerns that its exposure to Greek debt could trigger its collapse or force a break-up of its operations.

Belgium's finance minister Didier Reynders promised that the French and Belgian governments would "step in if necessary" to bail out Dexia, following an emergency board meeting that left open the possibility of the bank's break-up.

But investors have so far ignored these assurances. Dexia shares lost more than a third of their value in the morning before stabilizing at roughly -23 percent.

Reynders discussed the bank's problems during a meeting with his French counterpart, Francois Baroin, on the sidelines of eurozone talks in Luxembourg. Reynders insisted that savers' deposits were secure, adding: "The French and Belgian governments are behind their banks, whether it's Dexia or another one."

Second rescue

The Franco-Belgian bank, already bailed out when the US mortgage market crashed in late 2008, suffered a 10 percent drop on Monday following warnings of an imminent credit rating downgrade linked to fears about its liquidity and wider concerns over its exposure to eurozone sovereign debt.

The Brussels-based bank specializes in public sector financing, particularly in France, but also operates private and commercial banking branches. It suffered huge losses during the financial crisis of 2008 and 2009 but appeared to have recovered. Its total assets at the end of 2010 were valued at over 560 billion euros ($745 billion).

Dexia is heavily locked into long-term financing deals with French local authorities, and deals in this area could be the first part of the bank's operations to be hived off, banking sources told news agency AFP.

Some 95 billion euros in assets that are weighing heavily on the bank could be split off. Ratings agency Fitch highlighted "structural weaknesses" at Dexia last week, warning of increasingly difficult access to financing.

Toppling dominoes

The Belgian and French finance ministers held their direct talks amid rising eurozone concern over possible knock-on effects for an under-capitalized banking system if Greece defaults and other sovereign debt risks emerge if the bloc's economic downturn sharpens.

French banks have been hit especially hard as ratings agencies have marked them down for having over-invested in risky Greek and other weak eurozone sovereign bonds.

Generally, all banks have increasingly been restricted to short-term funding sources on markets in recent weeks, further pushing up the cost of maintaining their liquidity, Moody's noted on Monday.

Author: Ben Knight (AFP, Reuters, AP)
Editor: Sam Edmonds