Wednesday, November 23, 2011

Dexia Bank failure will cost France it's AAA rating?

Dexia, a big European bank based in Belgium and France failed a couple of weeks ago. Presumably (the newsies didn't say) Dexia ran out of money to pay bills and depositors and no one would lend to it any more 'cause everyone thought they were broke. At least that's what happened to Lehman Bros, and Merrill Lynch, and some other late lamented Wall St brokerages.
Belgium and France were going to bailout Dexia, but now it seems that isn't gonna work. An internet post speculated that Dexia's failure and non-bailout, might be enough to knock France's bond rating down from AAA.
What the post did not say was what the bailout plan was. Dexia, of course, wants the Belgian and French governments to just give them money (grants or loans, they will take anything) to continue in business, and avoid laying everyone off. I have no idea how much money this might need, but it could be big. On this side of the pond, AIG sucked up $140 billion.
What would be cheaper, is to pay off just the depositors, and let the bond holders, the stock holders, and the idiots that lent to Dexia go whistle for their money. This would impose some economic discipline, and put the idiots who drove Dexia over the cliff out of work. Europeans need to learn that lending money is risky, it is not a guaranteed never-loose-a penny sinecure. The hard part of banking is predicting if the borrower will be able to pay off the loan. Predictions are hard, especially when they are about the future.

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