As France and Belgium fight to prevent European bank Dexia from going under, could the institution’s troubles herald the beginning of a new and more calamitous phase for Europe’s debt crisis?
The two countries promised Tuesday to insure the bank’s deposits after its stock price was brutalized amid investors’ concerns about its exposure to potentially bad debt from Europe’s most debt-laden economies. Shares of the Franco-Belgian bank were down some 40 percent at one point Tuesday.
Many in Europe expect a Greek debt default to happen soon. The greater concern for market participants is what bonds European banks are holding. Fears that banks could face large losses on their holdings of euro zone sovereign debt have made financial institutions in Europe reluctant to lend to one another and have led other creditors to limit their exposure to Europe. The situation, coupled with a regional economic slowdown, threatens to morph into a full-blown banking crisis. The fear is that more banks like Dexia are yet to be exposed.
There’s a worrying parallel here too. The Financial Times points out Tuesday that, like U.S. bank Bear Stearns, which heralded the financial crisis of 2008, Dexia “may be sending a warning that we should be more worried.” Columnist James Mackintosh notes that Bear, destroyed over fears of its unsellable toxic subprime mortgage investments, was “an ex-canary on the dirty coalface of Wall Street.” Dexia may be taken down by its unsellable toxic subprime sovereign debt, particularly from Greece, and herald a more severe financial crisis in Europe.
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