S&P cuts core Dexia banks by one notch, on watch

Standard and Poor's on Friday downgraded the core banks of Franco-Belgian financial group Dexia by one notch, citing difficulties in securing wholesale funding and the need for increased collateral.

The ratings agency also said it could take further action, including further downgrades or even an upgrade, depending on how a proposed restructuring panned out.

The board of Dexia, whose shares are suspended, will meet in Paris on Saturday to vote on a break-up plan after Belgium and France pledged to guarantee its financing in the face of a share-price slide.

"We expect to resolve the CreditWatch placement once we have more information about what the restructuring means for Dexia's operating banks and more details about accompanying support that the French and Belgian governments could provide," S&P said in a statement.

S&P said it had lowered ratings by one notch to 'A-/A-2' on Dexia Credit Local, Dexia Bank and Dexia Banque Internationale a Luxembourg, which together represented over 90 percent of the group's consolidated assets.

It also placed those ratings on CreditWatch with developing implications.

"We could raise the ratings on some of Dexia's operating banks if separation from the group would strengthen their financial profiles or result in greater parent or government support," said the agency.

"The CreditWatch placement also reflects the possibility of a downgrade for some or all of Dexia's operating banks if funding problems deepen or asset sales accelerate," it added.

Asset sales could weaken capital if Dexia were required to recognise in its earnings some of the group's 6.9 billion euros of negative revaluation reserves on available-for-sale securities, said S&P.

The agency said the ratings reflect the strong support Dexia receives from the Belgian and French governments.

"(They) are likely to provide further support to Dexia --a highly systemically important bank in our view -- if necessary," said S&P. – Reuters