Belgium slashes Dexia guarantee

Belgium and France have decided to halve the guarantees that they provided for Dexia's bad bank. The bad bank was created to group all Dexia's problematic loans when the group was dismantled last October.

Belgium and France are now only guaranteeing the bad bank to the tune of 45 billion euros and not the original 90 billion.

The decision comes after the rating agency Moody's downgraded Belgium's sovereign debt pointing to its exposure to the Dexia bad bank as one of the reasons for the move. France too is known to be worried about a possible loss of its AAA rating.

It was Belgium's brand new Finance Minister Steven Vanackere (Flemish Christian democrat) who broke the news.

The bad bank owns billions of euros worth of government bonds that may never be repaid as well as subsidiaries in Italy, Spain and Germany.

Belgium decided to nationalise Dexia's high street operations in October paying 4 billion euros for the privilege. It also underwrote 60.5% of Dexia's guarantees to the bad bank - worth some 54 billion euros.

The scale of the guarantee and Belgium's large share were immediately the subject of criticism. Belgian Finance Minister Vanackere told VRT News that the cabinet on Friday decided that the temporary guarantee provided together with the French would total 45 billion and not the original 90 billion: "The guarantee will be used to repay the National Bank or debts to Dexia Bank Belgium. We are reducing the risk as much as possible, step by step."