Belgan unwind

I was going to say shit storm but thought better of it.

But there is one and Dexia, which I wrote about just a few days ago, is at the centre of it.  In short there is the chance the Dexia could pull down both Fortis and ING - or at least knock them off their feet.

Here's what is happening.  Dexia's share price has been dropping.It has lost a fifth of its share price in the last month and lost 6% today. And that is causing something called Communal Holdings to teeter on the edge of bankruptcy. Communal Holdings is the investment vehicle for many if not all of Belgium's communes and cities.  In fact Dexia grew out of the semi privatization of part of Communal Holdings/Credit.

Communal Holdings has, therefore. always held a great deal of its wealth in Dexia stock. Dexia, like Northern Rock and RBS believed it could become a tiger. Not a Celtic one, a Belgian one. Grrr!

Sadly Belgian tigers are laughed at more than feared. Dexia was bailed out not only by Belgium but quietly by the FED and the ECB as well. It also seems that during the first part of the crisis Communal Holdings may have bought more Dexia shares as a way of supporting/bailing it.

But that isn't the real problem. The present danger is because it turns out that the Belgian communes used their Dexia shares as collateral for taking on loans. And now as the share price collapses the amount of collateral is similarly disappearing. The banks from whom the communes took the loans are Fortis and ING. Very probably Fortis and ING swapped out the Deixa share-backed loans for shorter term debt and /or used the income as collateral in yet more loans.

With the collapse in Dexia share price ING and now Fortis are making Margin calls on Communal Holdings. Margin call simply means that Fortis and ING ask Communal Holding to provide more collateral against the loans to make up the value that has been lost from the originally pledged collateral. What always makes 'Margin calls' hit the headlines is that in a world of high leverage borrowers very often don't have any more collateral lying around and so the dreaded 'Margin Call' often presages a fire sale. And because investors know this, a Margin Call often also sparks investor sell off, which of course makes the original short fall due to share price decrease worse.  And sometimes the share price and margin calls get locked into a self destroying spiral.

Aparently teh Belgian government has already had to step in to bail out Dexia today. I doubt it will be the last time. And in this story is a pattern of bank to bank contagion that we might be seeing more of as share prices in teh French, Italina dn Greek banks contunes to plummet.