It is an irrevocable, unconditional, direct, autonomous and first demand guarantee. The guarantee is joint but not several, and the allocation between the States (respectively 60.5, 36.5 and 3% for Belgium, France and Luxembourg) remains the same. The guarantee covers financial contracts and securities…
Yep. Dexia.
These are rejigged sovereign guarantees for the broken Franco-Belgian lender. We’ve been expecting them since its funding collapse in October, through to Dexia’s loss of collateral worthy of enough ECB liquidity for its needs, and up to its tapping of emergency liquidity from national central banks (ELA). The latter made some kind of temporary guarantee urgent, and that’s what we have — a €45bn programme, pending a full €90bn one which needs approval by the European Commission.
There is a further interesting bit in the terms and conditions of the temporary guarantee though:
• the initial maturity is set for 31 May 2012;
• a ceiling of €45 billion has been set to cover the financing needs of the Group during the period covered by the temporary guarantee and to reduce its dependence on refinancing by the central banks; [NB note plural! - Ed.]
• as in 2009, the guarantee covers short and medium-term financial contracts and securities having a maturity of three years or less;
• Dexia will provide the three States with collateral for some of the guaranteed obligations issued under the benefit of the temporary agreement;
• The remuneration of the guarantee will involve a commitment fee of €225 million in addition to monthly fees calculated on the outstanding amount of guaranteed debt, in accordance with the European Commission’s guidelines.
Collateral! We’re not sure of when, if ever, eurozone government guarantees for refinancing have asked for collateral from banks, even if these arrangements are temporary and Dexia’s case pretty anomalous.
Dexia would be a funny place to start. It failed to get enough ECB funds in the first place because it had already pledged much of its eligible collateral elsewhere, encumbering this in secured funding deals. Some of these deals were to swap low-quality assets for better ones from counter-parties, the bank has said. Dexia’s tapping of non-ECB emergency liquidity would have required it to post collateral as well, though without the ECB constraint on eligibility. Presumably Dexia could transfer these assets to its guarantees from winding down its use of ELA, but the whole point is that these assets aren’t very good.
Better than nothing, we guess, but recompense for the three sovereigns now propping up Dexia (or a solution to its collateral crunch)?
Update (1045 UK time) — As pointed out in comments, France’s 2009 public-private guaranteeing vehicle – the Société de financement de l’économie francaise — took collateral from banks in return for loans. So it’s been done before!
Related link:
ECB as Pawnbroker of Last Resort (POLR) – FT Alphaville
Draghi: “We are aware of the scarcity of eligible collateral” – FT Alphaville
Dexia brought to a halt – FT (October 2011)