Belgium and France: Dexia Group Capital Injection, 2008

Dexia primarily relied on wholesale funding markets because of the impossibility of a material increase in its customer deposit-taking activities. The freezing of interbank and capital markets in the aftermath of the collapse of Lehman Brothers caused a significant short-term liquidity gap for Dexia. Impairments on credit assets and exposure to struggling sovereign counterparties worsened Dexia’s liquidity situation. In response to these financial difficulties, Dexia’s board of directors decided to pursue a capital increase of EUR 6.4 billion (Boudghene et al 2010; EC 2008).

On September 30, 2008, authorities from Belgium, France, and Luxembourg announced that they would inject the necessary EUR 6.4 billion, given that Dexia was unable to source equity contributions from private sources. The Belgian prime minister stated that the state contribution was made so that Dexia “can face the events playing out in financial markets” (White 2008). French authorities participated in order to ensure the continued financing for local French governments, as well as to contribute to stability in the European financial system (White 2008).

During the acute phase of the Global Financial Crisis (GFC), Dexia accessed Federal Reserve liquidity through its New York banking office, borrowing USD 58.5 billion in September 2008. The French and Belgian central banks also provided Dexia with emergency liquidity assistance (ELA) totaling EUR 15 billion on October 1, 2008 (EC 2008; Wiggins, Tente, and Metrick 2019).

Alongside the capital injection, Belgium, France, and Luxembourg collaborated to provide a joint credit guarantee for Dexia. The guarantee covered all of Dexia’s financing measures and debt issuances, provided that they fell due before October 31, 2011 (EC 2008). For further discussion of the broader bank debt guarantee, see Lawson (2020). 

The EUR 6 billion capital injection preceded the creation of a restructuring plan for Dexia. The European sovereign debt crisis of 2011–2012 caused an irreparable shock to Dexia’s asset portfolio in 2011, forcing recapitalization and nationalization of DBB and DBIL by their respective governments, a further EUR 5.5 billion capital injection into Dexia SA, and the creation of an orderly resolution plan. For further detail on the restructuring of Dexia SA, see George (2024).

The Law of April 2, 1962, established the Federal Participations and Investment Company (SFPI), a quasi-private entity that handled government interventions into Belgian businesses. SFPI had the authority to take equity stakes in Belgian companies and participate in their management. Regarding capital injections, Livre V Part V of the Act of 7 May 1999 established the laws regulating capital increases in Belgian institutions. To support immediate intervention, authorities removed existing shareholders’ preemptive rights (see Key Design Decision No. 13, Other Conditions), which would have given them priority access to purchasing new shares. Article 598 of the Act of 7 May 1999 dictated that when shareholders’ preemptive rights are limited, the price of issuance cannot be less than the average over the course of the 30 preceding days (EC 2008; SFPI 2021; Government of Belgium 1962; Government of Belgium 1999).

Regarding French participation in the capital injection, a decree issued on September 9, 2004, established the French agency responsible for public shareholdings and outlined its powers (Government of France 2004).

All State Aid measures required the approval of the European Commission (EC). At the time of the capital injection, Reuters reported that the EC expressed confidence that the intervention complied with all State Aid rules (EC 2008; Reuters 2008).

In its decision of February 26, 2008, the EC found that Belgium, France, and Luxembourg implemented aid unlawfully regarding the capital injection, guarantee, and liquidity assistance guarantee. This required authorities to form a restructuring plan in order to transform the emergency aid into restructuring aid. The EC formally approved the plan on February 26, 2010 (EC 2010a).

The Belgian government injected capital into Dexia using SFPI. SFPI was an independent legal entity created to undertake investment transactions that did not meet economic criteria but held societal value. As such, SFPI had four major mandates:

1. Stimulate the development and establishment of private enterprises
2. Promote economic public initiative
3. Contribute to the execution of the economic strategy of the state
4. Give opinions at the request of the federal government

A coalition of officials from the governments and central banks of Belgium, France, and Luxembourg collaborated with Dexia’s board of directors on the capital injection (SFPI 2009; Piffaretti 2013; Thomas 2012). A graphic of the stakeholders present at the capital injection negotiations is shown in Figure 2.

Media sources reported price tensions between the Belgian and French governments as well as between Belgium’s federal leaders and regional authorities. These points of contention largely revolved around the breakdown of the capital to be provided to Dexia. Both the French and Belgian authorities aimed to minimize their respective costs related to the resolution of Dexia. The strategic interests of the two differed as well, with the Belgian state looking to promote financial stability and the French looking to preserve a key source of municipal funding (Financial Times 2011; IMF 2014).

Following the EUR 5.5 billion capital injection, greater than 94% of Dexia’s share capital was owned by the governments of Belgium and France (Dexia 2013).

Belgium was the consolidated supervisor of Dexia, and a memorandum of understanding (MOU) backed the supervisory college of Belgium, France, and Luxembourg. The capital injection was subject to the oversight of the EC and State Aid rules (EC 2008; EC 2010a; IMF 2014).

As a 100% state-owned bank, Belfius leadership consulted with SFPI periodically concerning company performance and risk management (Belfius 2023b).

Dexia issued a statement on September 30, 2008, announcing the capital increase and its intentions. The announcement did not specify the percentage breakdowns between the governments of Belgium, France, and Luxembourg and the existing shareholders. The Belgian Prime Minister also spoke to VRT News, rationalizing that the state’s actions were necessary for Dexia to face the events taking place in financial markets. On the same day, EC officials stated that they were confident that the capital injection was compatible with State Aid rules (Dow Jones International News 2008; Reuters 2008; White 2008).

In early October 2008, the European Commission (EC) received communications from the central banks of the three associated countries providing context for the capital injection. The letters provided justification for the urgency with which the governments pursued the capital injection (EC 2010a).

The management of Dexia communicated the status of the bank and the restructuring process that followed the capital increase in its annual reports (Dexia 2009; Dexia 2010; Dexia 2011; Dexia 2012; Dexia 2013).

The initial EUR 6 billion capital injection into Dexia resulted in approximately 50% of its capital being held by public entities. The original EC decision did not characterize the ARCO contribution to the capital injection as State Aid; however, EC authorities investigated this characterization after learning about the guarantee against losses on equity stakes.^FNFor further context on the ARCO contribution, see George (2024b). In a January 2012 hearing before the Belgian House of Representatives, the minister of finance stated that he “had not been sure” of the guarantees owing to fears that they would not be accepted by the EC. He called the setup of the guarantee a “political compromise” that had been necessary to save Dexia. The investigation found that the guarantee of ARCO from losses violated State Aid rules (Court of Justice of the European Union 2016; Dexia 2009; EC 2013).

Given that Belgium and France held the majority of Dexia’s shares, they were compelled to provide a further EUR 5.5 billion capital injection to compensate for the massive losses. This effectively nationalized Dexia, with only 4.5% of its capital still floating as of December 2012. The ownership stakes of individual and institutional shareholders decreased from 30% at year-end 2011 to 4% at year-end 2012. This resulted in substantial losses for institutional shareholders ARCO and Holding Communal, forcing them into liquidation. There were no bail-in measures for creditors or depositors, as the governments and public agencies of Belgium and France bore the full cost of the capital injection (Dexia 2012; Dexia 2013; EC 2008; EC 2013; Thomas 2012).

The capital injection accompanied the removal of preemptive rights for existing shareholders (See Key Design Decision No. 13, Other Conditions) (EC 2008).

Belgian and French authorities subscribed to ordinary Dexia shares, each with a nominal value of EUR 9.90. Dexia’s share price had fallen 30% on the day before the capital injection, September 29. That said, the issue price was determined by the average closing price of Dexia shares over the course of the 30 days preceding the capital injection (Dow Jones International News 2008; EC 2008).

Though it never came to pass (see Key Design Decision No. 9, Size and Source of Funding), the Luxembourg state’s contribution to the capital injection would have come in the form of hybrid capital from Dexia’s subsidiary, Dexia Banque Internationale Luxembourg SA (BIL). The convertible bonds had a maturity of three years and a 10% rate of interest (EC 2008).

In total, the capital injection amounted to EUR 6 billion. Luxembourg originally committed to provide EUR 376 million in the form of convertible bonds with a three-year maturity. The eventual restructuring plan approved by the EC on February 26, 2010, waived this contribution owing to the illegality of the size of the capital increase. The governments of Belgium and France subscribed to 606 million shares at a nominal price of EUR 9.90 each. Taking the EC’s waiving of the Luxembourgish contribution into account, the capital injection totaled EUR 6 billion, an equal contribution of EUR 3 billion each from Belgium and France. The European Commission (EC) regarded EUR 5.2 billion as State Aid (EC 2008; EC 2010a; EC 2010b).

The Belgian contribution to the capital injection was divided between different regions and government entities. The Belgian state directly invested EUR 1 billion, with the Flemish Region and Holding Communal SA each contributing EUR 500 million. The Walloon region and Acrofin SC each contributed EUR 350 million, while the Bruxelles-Capitale region and Ethias contributed EUR 150 million. This amounted to a Belgian contribution of EUR 3 billion. The EC did not classify the contributions from private firms Ethias, Acrofin, and Caisse Nationale de Prévoyance (CNP) Assurance as State Aid. Ethias had not been nationalized at the time of the capital injection, and the majority of the shareholders for Acrofin and CNP Assurance were private actors. As such, these contributions did not constitute state resources (EC 2010a).

The French State directly invested EUR 1 billion, which was managed by the Agence des Participations de l’Etat. The Caisse des Dépôts et Consignations (CDC) provided EUR 1.7 billion, and CNP Assurances provided EUR 228 million, bringing the total French contribution to just under EUR 3 billion (EC 2008).

Following the failure of Lehman Brothers on September 15, 2008, Dexia faced difficulties as international credit markets froze. Dexia faced acute pressure on September 29, 2008, following the bailout of Fortis,^FNFor more information on the capital injection provided to Fortis, see (George 2024a). leading to bail-out negotiations between the bank and authorities in Belgium, France, and Luxembourg (EC 2008; Thomas 2012).

Starting in the afternoon on September 29, 2008, overnight negotiations between Belgian, French, and Luxembourgish authorities, as well as existing major shareholders,^FNThe major shareholders included Holding Communal, Acrofin SC, and Ethias (EC 2008). led to the finalization of a plan early in the morning on September 30, 2008. The plan was approved on the condition that the Dexia chief executive officer resign (see Key Design Decision No. 12, Treatment of Board and Management). Authorities announced the capital injection that same day, after Dexia’s board of directors gave their unanimous approval. The formal share issuance occurred on October 3, 2008 (EC 2008; Piffaretti 2013; Slater 2008; Thomas 2012).

The capital injection preceded the creation of a restructuring plan intended to downsize Dexia’s risk portfolio and prioritize its historical business lines. While the restructuring plan restored stability for a brief period, the European sovereign debt crisis caused acute liquidity pressure that sent the bank into orderly resolution (Dexia 2009; Dexia 2013). A full discussion of the orderly resolution plan for Dexia can be found in the corresponding case study (George 2024b).

Following the announcement of the capital injection, Dexia’s chief executive officer and board chairman both resigned their posts. Dexia’s board of directors accepted their resignations and asked the two to continue overseeing daily affairs until the remaining board members identified successors (Agence France Presse 2008).

In the days following the capital injection, Dexia named Pierre Mariani, former chief of staff to then budget minister Nicolas Sarkozy, as CEO, and former Belgian prime minister Jean-Luc Dehaene as chairman of the board (Dexia 2010).

The capital injection accompanied the removal of preemptive rights for existing shareholders (see Key Design Decision No. 3, Legal Authority). The removal was predicated on the need for immediate intervention (EC 2008).

Research did not reveal any regulatory relief associated with the capital injection.

At the time of the capital injection, no exit strategy was given for the state capital holdings. The new management was entirely focused upon downsizing risk and rebuilding the Bank’s cost structure while giving priority to historical business lines. As such, the state shareholding remained roughly the same until 2011, when the European sovereign debt crisis again caused extreme pressure for Dexia’s liquidity. This crisis led to the introduction of an orderly resolution plan involving a further capital injection of EUR 5.5 billion from Belgium and France. As a result, the Belgian and French states together held 94% of Dexia’s shares. Dexia remains in orderly resolution as of the writing of this case, with Belgium and France continuing to hold the vast majority of the bank’s shares (Dexia 2009; Dexia 2010; Dexia 2011; Dexia 2012; Dexia 2013; Dexia 2023a).

As part of the restructuring and resolution, Dexia sold DBB (renamed Belfius after the transaction) to Belgium for EUR 4 billion on October 20, 2011.^FNFor a full account of the sale of DBB/Belfius as part of the restructuring and resolution of Dexia, see (George 2024b). The 2016 Belfius annual report stated that the bank’s leadership considered a partial privatization to be desirable. Given its large role in Belgian public finance, Belfius leadership intended for as much of its ownership as possible to remain in Belgium. After announcing preparations for a partial IPO in its 2017 annual report, the SFPI delayed the partial reprivatization in 2018, citing volatility in financial markets. The impact of COVID-19 on financial markets further disincentivized the reprivatization of Belfius. As of year-end 2022, Belfius was a healthy, systemically important bank with a book value of EUR 11.1 billion. It remains wholly owned by the Belgian state (Belfius 2017; Belfius 2023b; Blenkinsop 2018; Dexia 2012; ECB 2023; SFPI 2018; SFPI 2019).