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Is the Dexia mess the start of a new financial crisis?

Is the Dexia mess the start of a new financial crisis?
Posted by Michael Schuman Tuesday, October 4, 2011 at 9:20 am

In the clearest indication yet that Europe’s sovereign debt crisis is morphing into a wider, financial sector crisis, a big European bank might be looking at a break up. The talk in Europe is that French-Belgian specialty lender Dexia could be dismantled, with healthy units sold off and other assets dumped into a “bad bank.” None of that has been confirmed yet. But the reports come after Moody’s on Monday warned it could downgrade the ratings of Dexia’s operating units, and the Dexia board asked the bank’s CEO to “resolve the structural problems” troubling the bank. Government officials stepped in to calm investors on Tuesday morning, with the French and Belgian finance ministers pledging to guarantee financing raised by Dexia and protect its depositors.

So is Dexia the new Lehman, the starting gun for a renewed financial crisis? Let’s not get ahead of ourselves. Dexia has long-standing problems – it got bailed out during the 2008 meltdown – so it’s not a perfect poster child of the European banking sector. However, the woes that have pushed it into crisis are symbolic of the pressures facing other European banks today. That means it is possible that other Dexias are lurking in the European banking sector.

Recent concerns about the European banks have been based on fears that they could face significant losses on their holdings of euro zone sovereign debt. Those fears have caused short-term financing to Europe’s banks to dry up, as other creditors try to limit their exposure to Europe. In a worst-case scenario, the one-two-three punch of a credit crunch, a slowing economy and losses on bonds from the PIIGS would tip off a banking sector crisis that could look much like the meltdown on Wall Street that caused the Great Recession in 2008.

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