EU approves Dexia rescue, probes restructuring

(BRUSSELS) - European Union competition authorities gave themselves three months from Wednesday in which to determine if a giant rescue of Belgian-French bank Dexia can succeed.

First bailed out in 2008 at the height of the global financial crisis, Dexia could not cope with the turmoil of the eurozone debt quagmire and in October, France, Belgium and Luxembourg stepped in to wind up the bank.

The European Commission decision gives its approval for three months to allow the governments to determine the best way to do that.

"The purpose of the guarantee is to enable the bank to draw up a restructuring plan, or -- should Dexia SA prove not to be viable -- a liquidation plan, which the three member states undertake to submit to the Commission within three months," the EU executive said in a statement.

The Commission said it was giving temporary approval to guarantees worth "a maximum capital value of 45 billion euros ($58 billion)," 60.5 percent of which comes from Belgium, 36.5 percent from France and 3.0 percent from Luxembourg.

The EU's competition watchdog said that "the guarantee mechanism is necessary in order to preserve the financial stability of the member states concerned, given the systemic importance of Dexia SA."

However, it also expressed "doubts at this stage as to whether the temporary guarantee measure is compatible with the single market," noting the previous restructuring plan agreed after the global financial crisis.

Having fallen behind on commitments agreed in February 2010, the Commission said that an "imbalance" in its financing -- Dexia relied heavily on short-term bank funding -- "has worsened again since last summer."

As this adds up to a "significant change" compared to the previous green light, "a re-examination of the restructuring of Dexia, with the submission of a new restructuring or liquidation plan, is therefore needed," it said.

"The Commission will reassess the temporary refinancing guarantee as a structural measure as part of its examination of the restructuring plan or liquidation plan to be presented," it said.