BRUSSELS, Belgium

France and Belgium were fighting to prevent Dexia from going under as investors grew increasingly worried over its ability to survive a renewed credit crunch.

The two countries promised yesterday to prop up the bank and insure every cent of its deposits in response to a calamitous decline in the bank’s share price over the past couple of days.

Dexia is at the forefront of investor concerns over its exposure to potentially bad debt from Europe’s most indebted countries. With the markets bracing for a Greek debt default soon, investors are concerned about what bonds Europe’s banks are holding and banks themselves have become reluctant to lend to one another.

At one point yesterday its share price plunged nearly 40 per cent, prompting France and Belgium to launch crisis-management initiatives designed to prevent a complete rout.

Their attempts to reassure appear to have eased the selling pressure somewhat, and Dexia’s share price was trading 17 per cent lower on the day.

Belgium and France have effectively sought to reassure Dexia clients and creditors that they won’t lose their money.

“The Government will take its responsibility for the continuation of the bank,” said Yves Leterme, Belgium’s caretaker prime minister.

Dexia stock began to plummet Monday after Moody’s warned it could be downgraded because of mounting difficulties it is facing getting short-term funding. In the wake of the warning, Dexia’s board of directors called an emergency meeting.

Yesterday, Dexia’s board of directors issued a statement ordering the bank’s management to take steps, in consultation with the Belgian and French governments, “to resolve the structural problems weighing on the group’s operational activities and offer new growth prospects”.

Belgium’s caretaker Government planned to hold an urgent meeting on Dexia yesterday evening, local media reported. The finance ministers of both countries also pledged government guarantees so the bank can get its hands on funding.

And Luxembourg’s Finance Minister Luc Frieden said his Government would play an active part in any restructuring of Dexia and that a solution would be found “soon”, However, nothing was imminent yesterday, Frieden added.

Luxembourg does not have a stake in Dexia, but the bank has extensive operations in the country.

Government attempts to shore up Dexia come after the bank’s board said it would resolve its “structural problems”, without giving details.

There has been speculation the bank will be split up with support from the French and Belgian governments — both of which have stakes in the bank following a 2008 bailout.

“We promised all account holders and savers that they would not lose a eurocent in the crisis. There is no reason for that. We are determined to help Dexia weather this crisis without causing anyone any loss,” Leterme told the VRT broadcast network.

He said Belgian and French authorities were in discussions to see how they can “co-operate in solidarity as shareholders to lead Dexia through this tough time”.

One way forward would be to isolate Dexia’s toxic assets — totalling euro100 billion (US$132 billion) — in a “bad bank”. Its healthy parts, which are thought to include Dexia Asset Management and the Canadian RBC-Dexia BIL joint venture among others, would be sold individually this year, according to the dailies De Standaard and De Morgen. The proceeds would be used to prop up Dexia’s toxic leftovers, including businesses in France, Italy and Spain, into a so-called “bad bank”.

Dexia got a government and shareholder bailout in late 2008 when it ran into trouble with its US bond insurance unit, FSA, during the US subprime crisis.

As a result, Belgium, France and Luxembourg said they would inject almost euro6.4 billion to keep it afloat.

The bailout led to Dexia being owned 17.6 per cent by France’s sovereign wealth fund, the Caisse des Depots et Consignations. The French and Belgian governments each own another 5.7 per cent of the bank, and three Belgian regional authorities jointly hold another 5.7 per cent stake.

Since the bailout, Dexia has worked to shore up its finances, and the statement it issued yesterday said it was making progress.

But Europe’s worsening debt crisis and the resulting reluctance among banks to lend to one another have exacerbated Dexia’s troubles.

AP

BRUSSELS, Belgium — A man walks by the Dexia corporate headquarters in Brussels yesterday. Shares in the troubled bank tanked by more than a fifth yesterday as investors grew increasingly concerned about its survival in its current form despite government promises to prop up the bank and insure every cent of its deposits. (Photo: AP)