The sudden concern over Dexia, which is heavily invested in European government bonds whose value is now in doubt, highlighted the threat that euro-zone bank failures could trip up the world economy.
The governments of France and Belgium, co-owners of Dexia since an earlier 2008 bailout, pledged support for the lender and reassured depositors that they would not lose their money. The bank may be heading for a restructuring that would segregate its government bonds and other suspect investments in a new “bad bank.”
With Dexia’s stock price plummeting, European finance ministers in Luxembourg indicated that they may finally embark on a course urged for months by the United States and officials at the International Monetary Fund. This could involve a broad effort to bolster capital levels among Europe’s major banks.
Problems in the banking system — particularly doubts about the value of government bonds — have prompted banks to stop lending to each other and, according to analysts at the IMF and elsewhere, begun to undermine the region’s already tepid economic growth.
U.S. officials in recent weeks have intensified their focus on Europe’s problems and the potential threat to the U.S. recovery. Treasury Secretary Timothy F. Geithner warned of “cascading default, bank runs and catastrophic risk” posed by the region. Federal Reserve Chairman Ben S. Bernanke told Congress on Tuesday that at a minimum Europe’s problems “have hurt household and business confidence, and . . . pose ongoing risks to growth.”
According to wire service and other reports from Luxembourg, finance ministers have been discussing a regionwide move to boost bank capital.
“There is an increasingly shared view that we need a concerted, coordinated approach,” European economic and financial commissioner Olli Rehn told the Financial Times after the meeting. “There is a sense of urgency among ministers and we need to move on.”
The problems at Dexia set off fresh alarms about whether banks may face losses stemming from Europe’s government debt crisis. Bank failures in Europe could trigger the kind of worldwide financial seizure seen after Wall Street investment bank Lehman Brothers collapsed in late 2008.
Dexia’s problems go back at least that far, when it received billions of dollars from European governments and the U.S. Federal Reserve to stay afloat.
The bank’s troubles have returned, with the danger now resulting from troubled bonds issued by ailing countries such as Greece rather than from subprime mortgages in the United States.