August 3, 2012 / 7:38 AM / 5 years ago

UPDATE 2-Dexia loss adds to French and Belgian pain

* H1 net loss 1.17 bln euros vs 3.93 bln year-ago

* Dexia seeking more state guarantees

* Analysts say bank may need capital hike

By Lionel Laurent

PARIS, Aug 3 (Reuters) - Dexia, a high-profile casualty of the euro zone debt crisis, posted another huge loss on Friday underlining the scale of the task facing its new chief executive, as France and Belgium argue over how much their rescue of the bank will cost.

CEO Karel de Boeck - who previously headed Fortis, another Benelux bank that succumbed to financial-market turmoil - will have to manage tensions between Dexia's owners as the likelihood grows that it will need a capital increase to strengthen its balance sheet.

Dexia, which narrowed its first-half net loss to 1.2 billion euros ($1.46 billion), is being broken up under the close scrutiny of European regulators after Belgium, France and Luxembourg bailed it out for a second time last October.

The question of who foots the rescue bill is at the heart of talks between Dexia's cash-strapped parent countries and the European Commission on the final size and cost of state guarantees for the bank.

Dexia, once the dominant lender to French local governments and other public entities like hospitals, wants guarantees to swell to 90 billion euros, close to the recently agreed 100 billion euro bailout for Spain's entire banking sector.

Belgium, which took over the bank's retail arm, is negotiating to get France to take a bigger chunk of the financial burden.

Bernhard Ardaen, a former Dexia banker who has written a book on Dexia's collapse called "Time Bomb", says the bank's needs could eventually swell the French budget by 75 billion euros, while Belgium's public debt could shoot up by 150 billion euros to 1.5 times its annual output.

Dexia is determined "to reduce the burden it represents for the states," Boeck said on Friday.

His well-flagged arrival follows the departure of Pierre Mariani, who was parachuted in to overhaul Dexia after it was bailed out for the first time during the 2008 global financial crisis. But the increasingly messy 2011 rescue forced Mariani out.

CAPITAL HIKE

At 1220 GMT, Dexia shares were up 1 euro cent, at 0.22 euro cents. The stock has fallen 90 percent since the end of 2011 to reach "penny-stock" levels. Many analysts have stopped covering the group.

The bank has sold assets including Turkish unit DenizBank and its holding in its custody venture with Royal Bank of Canada to comply with European Union concerns that its rescue may have constituted state aid.

On top of borrowing guarantees, Dexia is also expected to need an influx of fresh capital, which Keefe, Bruyette & Woods analyst Jean-Pierre Lambert has estimated could be up to 5 billion euros.

What will remain of Dexia after it finishes shedding assets will be a holding of bonds and loans that will be sold over time. But making sure such an entity can be operationally profitable will be a costly challenge for the bank's management and its owners.

France is also preoccupied with finding new sources of financing to replace Dexia. La Banque Postale, which has been designated to succeed Dexia as the country's main municipal lender, said earlier this month it would double its capacity to lend to local governments after a spike in demand for credit.

Commenting on litigation risks, Dexia said it faced a clawback risk of $19.2 million as part of a civil suit against its Luxembourg unit. It also said there had been 33 client claims filed against its municipal lending arm Dexia Credit Local.

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