France, Belgium rush to aid of ailing Dexia

France and Belgium rushed to the aid of Dexia on Tuesday, in what will be the first state rescue of a European bank in the euro zone sovereign debt crisis.

The lender to hundreds of French and Belgian towns, which also needed propping up after the 2008 financial crisis, will see its French municipal finance arm broken off and put under the ownership of French state banks.

The rescue plan also looks likely to involve a broader break-up, with the sale of healthier operations, such as its Belgian and Turkish banking businesses, as well as the creation of a state-guaranteed pool of toxic assets.

“We have to put all the dangerous parts outside of the bank. It is here where the state guarantee will come into play, it’s what’s called a ‘bad bank’,” Belgian Finance Minister Didier Reynders said after a joint Franco-Belgian government statement pledging support.

Laid low in recent weeks by its heavy exposure to Greece and problems accessing wholesale funds, Dexia saw its shares drop as much as 38% to an all-time low on Tuesday as confidence in the group collapsed.

“Basically, what we’re getting towards here is backdoor nationalization,” said one London-based analyst speaking on condition of anonymity. “Everything that’s happening now is just a case of how you split up the pie but really the pie is all going towards the state, effectively.”

ING chief euro zone economist Peter Vanden Houte said if intervention was just guarantees, rather than cash injections, then French and Belgian finances should not be hit too hard.