Opinion of the European Central Bank of 13 October 2011 on a State guarantee covering certain loans granted to Dexia SA and Dexia Crédit Local SA (CON/2011/79)

OPINION OF THE EUROPEAN CENTRAL BANK of 13 October 2011 on a State guarantee covering certain loans granted to Dexia SA and Dexia Crédit Local SA (CON/2011/79) Introduction and legal basis

On 12 October 2011, the European Central Bank (ECB) received a request from the Nationale Bank van België/Banque Nationale de Belgique (NBB), acting on behalf of the Belgian Ministry of Finance, for an opinion on a draft royal decree granting a State guarantee covering certain loans granted to Dexia SA and Dexia Crédit Local SA (hereinafter the ‘draft royal decree’). The ECB was requested to deliver an opinion under extremely urgent circumstances. The ECB’s competence to deliver an opinion is based on Article 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , since the draft royal decree relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft royal decree

1.1 Article 36/24 §1 of the Law of 22 February 1998 establishing the Organic Statute of the Nationale Bank van België/Banque Nationale de Belgique empowers the King, on advice from the NBB, to adopt certain measures, including notably the establishment of a system to grant a State guarantee covering liabilities entered into by certain supervised institutions or covering certain claims held by

these institutions in the event of a sudden crisis in the financial markets or a serious threat of a

systemic crisis and, if the measures are taken, to limit the scale or effects thereof .

The draft royal decree is based on this empowering provision and is motivated by the need, given

the current turbulence in the international financial markets, to take certain measures to safeguard

the stability of and confidence in the Belgian financial system. These measures consist in the setting

up of a guarantee scheme covering particular loans of certain entities of the Dexia group in the

context of the group’s restructuring .

1.2 Under the draft royal decree, the Belgian State will guarantee loans granted to Dexia SA and/or

Dexia Crédit Local SA by other credit institutions or professional counterparts , up to a maximum

principal amount of EUR 54 450 000 000 . The guarantee will only apply for loans issued until

31 December 2021 at the latest and having a maturity of maximum 10 years . The guarantee will be

payable at first demand and its remuneration is to be determined by the Minister for Finance .

The entry into force of the State guarantee will be conditional on the Minister for Finance entering

into one or several agreement specifying certain aspects of the arrangement, notably: (i) the

identification of the guaranteed loans ; (ii) Dexia SA and Dexia Crédit Local SA’s undertaking to

pay the remuneration agreed for the guarantee and to implement any measure aimed at restoring

their solvability deemed useful by the Minister for Finance ; (iii) the duration of the guarantee and

events causing the guarantee to expire .

2. General observations

It is important to ensure that the draft royal decree and any subsequent implementing measures fully

comply with the relevant provisions of Union law, including competition and State aid rules. In this

respect, it is essential that Member States comply with the guidance given by the European Commission in its communications on the application of State aid rules to support measures in favour of banks and government guarantee schemes covering bank debt , including with regard to the temporary nature of the acceptability of such aid measures and the necessity for credit institutions receiving State support to submit a restructuring plan.

3. Interaction of the draft royal decree with the monetary policy of the euro area

The draft royal decree does not define the type of liabilities falling within the meaning of ‘loans’ under Article 1 of the draft royal decree since they will be defined in the agreement(s) referred to in Article 5 of the draft royal Decree. In this respect, the ECB makes the following observations. First, it reminds the consulting authority that government guarantees for bank debt should, when practically implemented: (i) address the funding problems of liquidity-constrained solvent banks by improving the functioning of the market for bank debt of longer-term maturity; (ii) preserve the level playing field among financial institutions and avoid market distortions; and (iii) ensure consistency in the management of Eurosystem liquidity. In this vein, government guarantees on short-term bank debt with a maturity of three to 12 months may be provided to revitalise the short-term bank debt market . In this regard, the ECB reiterates that granting government guarantees for bank debt with a maturity of less than three months should be avoided to the extent possible . Second, it is also stressed that it is of the utmost importance that support operations conducted by national authorities do not in any way affect the conduct and the implementation of monetary policy in the euro area . In this context, the ECB reiterates its view that the extension of the State guarantee to cover interbank deposits should be avoided , as this could entail substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and therefore impairing the implementation of the single monetary policy, which is an exclusive competence of the Eurosystem under Article 127(2) of the Treaty . It could also affect the

transmission of monetary policy decisions and make it difficult to maintain the necessary level playing field in the euro area between the financial institutions benefiting from the State guarantee and those not benefiting.

4. Temporary nature of the scheme

Also in line with the guidance given by the Commission on 30 June 2011 , the ECB notes the need for national support measures to be temporary in nature . It is understood that the support scheme covers a time period of up to 20 years, as the loans covered by the guarantee may be issued until 31 December 2021 at the latest and may be for a maximum duration of 10 years, and thus could be considered of a longer-term rather than temporary nature.

5. Pricing of the guarantee

As for Article 4 of the draft royal decree, the ECB underlines that, for the Minister of Finance to determine the remuneration due to the State for the guarantee, the pricing formula recommended by the Governing Council on 20 October 2008 should be taken into consideration. This was also supported by the Commission in its guidance related to the application of State aid rules to government guarantees of 2011.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 13 October 2011.

[signed]

The President of the ECB

Jean-Claude TRICHET