France, Belgium and Luxembourg pledged to guarantee new borrowing by Dexia SA to bolster last week's public bailout, restoring some confidence in the world's largest municipal lender.
Belgian Prime Minister Yves Leterme told a news conference on Thursday that the three countries would back until Oct. 31, 2009 new bonds and interbank or institutional financing with a maturity of up to three years.
The scheme, for which cross-border Dexia would pay a fee to reflect the benefit of lower interest rates it enjoys, could be extended for a further year.
"This guarantee gives assurance to depositors that Dexia has sufficient liquidity to honour its commitments to its clients," Leterme said.
The Belgian premier added that such a guarantee could be provided to all the country's banks under the same conditions.
French Economy Minister Christine Lagarde said such a scheme was not required for French banks.
The state guarantee, agreed in overnight talks, came after a 6.4 billion euro ($8.7 billion) cash injection by the three governments and public bodies on Tuesday last week failed to quell investors' fears.
Dexia shares, which had lost half their value in the past two weeks, were 28.1 percent stronger at 6.39 euros by 1240 GMT on Thursday. The DJ Stoxx European banking index was just 2.7 percent higher.
Dresdner Kleinwort analyst Jaap Meijer said the guarantee assured at least short-term liquidity after last week's solvency boost, but Dexia still had to act, notably on its loss-making U.S. bond insurance unit Financial Security Assurance (FSA).
"They still have to find a solution for FSA and they may have to rethink their business model with a reliance on external funding. The guarantees are only for three years," he said.
Dexia Chief Executive Pierre Mariani insisted the guarantee did not amount to state aid.
"It's the means to kick start mainly the interbanking financing for the group, interbank financing that is completely blocked, but not only for Dexia, for the whole of the sector."
U.S. SUBSIDIARY TROUBLES
Dexia Chief Executive Pierre Mariani said the guarantee "was fundamental to restoring confidence after a sharp drop in the share price."
However, no immediate solution was found for FSA, whose triple-A rating and therefore its business model is under threat.
Ratings agency Standard & Poor's downgraded Dexia's core entities on Tuesday for the second time in a week and said on Wednesday it may cut FSA's top rating, pointing to losses the unit had made on mortgage-backed debt.
"That's not something you can improvise on in one night or even two days" Dexia Chairman Jean-Luc Dehaene, a former Belgian premier, said of FSA.
Mariani told a conference call that the option of isolating FSA from the group would be far from simple, adding that a decision on the U.S. unit would be taken in the coming weeks.
A source close to the talks said Belgium would provide 60.5 percent of the guarantee, France 36.5 percent and Luxembourg 3 percent.
Dexia's situation was complicated by the fact that it is largely in the hands of public bodies, including Belgium's three regions and local authorities, which signed up for last week's capital injection at 9.90 euros per share.
Rival Fortis was dismantled by the Dutch, Belgian and Luxembourg governments and part sold to France's BNP Paribas at the weekend, leaving shareholders little. Analysts believed a similar carve-up of Dexia was highly unlikely.
"There are no rules," Belgian Finance Minister Didier Reynders replied to a question on the different types of rescue.
Leterme urged depositors on Tuesday not to withdraw funds from Dexia, vowing the government would stand by the bank.
Reynders said Belgium was likely to raise its deposit guarantees to 100,000 euros from 20,000 euros now.
