The European Commission has approved the prolongation for another 4 months of the temporary state guarantee on € 45bn of funding which expired yesterday.
The EC does however raise objections to vital elements of the restructuring plan, objections that may put Dexia’s business model in jeopardy. The objections are:
- proposes to reduce the remuneration for the € 45bn state guarantee to5 bps. The EC doubts that this is in compliance with EC regulation for State aid, certainly if the lowered remuneration is used to attract new funding;
- The € 350m participation of ARCO in the 2008 capital increase combined with ARCO’s cooperative shareholders receiving state guarantees in 2011 may indicate that the initial capital increase was also State aid for Dexia;
- The EC considers that the State aid received shouldn’t be used to continue the failed business model at the level of Municipal Agency.
The prolongation of the support agreement provides with a further temporary releave but given its financing needs it means that they are still tapping a considerable amount with the ECB. The continued decline of the German interest rates leads to an increased need for collateral and hence higher funding needs for which the € 45bn may be insufficient. The negative carry that results from the guarantee remuneration is unsustainable to have a viable business model hence the importance of EC accepting thelowered remuneration.
We maintain our Reduce recommendation and € 0.10 target.