Dexia Krach: The start of a domino effect in the EU ? *

8 October 2011 by Eric Toussaint

In the early days of October 2011 the virtual bankruptcy of the Franco-Belgian bank Dexia is yet another sign of how deep is this crisis that brings governments to serve public money to private interests. Dexia’s krach shows that it is the private banks that are the weak link in the debt crisis whereas governments and mainstream media highlight the public debt aspect of the crisis. [1]

In September 2011, faced with the weight of menaces that loomed over the whole private financial sector because of its irresponsible policies, western European central banks (the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, the Bank of England and the Bank of Switzerland) and the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
took a mightily significant measure: they would provide private banks with all the cash they need in dollars and euros for more than three months so they may weather the storm into 2012. This shows how deeply afraid governments and state treasurers are of what might happen in the last term of 2011. European banks that were borrowing in dollars on the short term from US money market funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
were being refused. Central banks had to intervene to prevent the kraches of BNP Paribas, Dexia, Société générale, Crédit Agricole, Natixis to mention but a few French and Belgian banks. This new krach at Dexia [2] shows that the measure was not sufficient to solve a problem that is wrongly perceived as a mere liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. shortage. Dexia may be only the first domino to fall in this fourth term of 2011.

 Governments as main creditors in first and last resort

This is another neat demonstration: in the EU, central banks of member states and the ECB cannot lend money to governments that must therefore borrow from banks and other institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. . The private sector is thus supposed capable of financing on its own and without help from the governments, the needs of public bodies, business, and households. Now central bankers, i.e. governments, turn out to be their main creditor in the first and last resort.
European private banks are financed in five ways:
1.They borrow from other banks on the interbank market Interbank market A market reserved for banks where they exchange financial assets among themselves and borrow/lend over the short term. The interbank market is also where the European Central Bank (ECB) intervenes to provide or take back liquidities (management of the money supply to control inflation). ;
2.They borrow from households that leave their cash deposits – wages and savings;
3.They borrow from non financial companies;
4.They borrow dollars from US money market Money market A short-term market where banks, insurance companies, corporations and States (via the central banks and Treasuries) lend and borrow funds according to their needs. funds (that borrow from the Fed);
5.They borrow from central banks.

Now the interbank market has shrunk to almost nothing for banks suspect each other of harboring toxic assets Toxic assets An asset that becomes illiquid when its secondary market disappears. Toxic assets cannot be sold, as they are often guaranteed to lose money. The term “toxic asset” was coined in the financial crisis of 2008/09, in regards to mortgage-backed securities, collateralized debt obligations and credit default swaps, all of which could not be sold after they exposed their holders to massive losses. ; household deposits in a time of crisis are not expandable, or worse, if households lose confidence in one or several banks, they may withdraw their deposits creating a run on the banks (which is a source of panic for bankers, central banks and governments, some of them as in France, limiting withdrawals by private customers); non financial companies withdraw their cash from the banks (in September the Financial Times revealed that the German TNC Siemens had transferred EUR 500 million from the French bank Société Générale to an account with the ECB) [3]; the money market funds have by and large stopped providing credit since June 2011. Consequently private banks turn mainly to central banks for credit.

 ECB effects massive purchases of public debt on the secondary markets

That is not all. The ECB maintains a policy of massive buying up, of Irish, Italian, Greek and Spanish bonds, on the secondary debt market. Between 8 August and 11 September it purchased government bonds to the value of 77 billion euro, of which, 40 billion were Italian. [4] This policy has a double objective :
- 1 Relieve West European private banks, who up to 2010 had been massively buying these bonds which are today considered to be potentially bad risks;
- 2 Try to avoid Italy and Spain getting into the same situation as Greece, Ireland and Portugal who, because of the explosion of their interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate, can no longer borrow for more than a year on the financial markets. The borrowing needs of Italy up to July 2012 are around 300 billion euro and that of Spain is close to 80 billion euro. If these two countries have to stop borrowing, because of exorbitant interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, the European Financial Stability fund (EFSF) will not dispose of sufficient means to cover their needs, not to mention the necessary buying up of Greek, Irish and Portuguese debts and perhaps also of other eurozone countries. [5] What’s more, the EFSF is a very impractical instrument, created in May 2010 in reaction to the Greek debt crisis. For proof of this it is sufficient to notice that ten weeks after the decision, on 21 July 2011, to increase its capital so that it may buy bonds and assist banks having difficulties, the ratification process by the 17 eurozone governments is still not completed.
Since 21 July the crisis has worsened; the stock markets remain unstable with very bearish tendencies, especially concerning banks; economic growth is in the negative everywhere, even in Germany that attained better results than the European average up to June 2011; the fall of consumption and industrial production has worsened; unemployment has increased almost everywhere; while exchequer revenue has decreased everywhere reducing the capacities of the states to service their debts; the possibilities of new failures of private financial institutions is generally feared.

 European governments caught in their own net

At the creation of the EU and the ECB it was decided that the ECB, along with the central banks of the member states, would not be permitted to lend directly to states, who should find their financing on the private markets (banks, insurance companies, pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
...). If the ECB and the different central banks had been allowed to lend to public institutions, as the Federal Reserve does to the United States government, the effects of the crisis would have been attenuated. Far from us to take the United States as a model, but it is worth noting that the Fed has been able to buy treasury bonds for more than 1700 billion dollars, including 900 billion since the liquidation of Lehman Bros. in September 2008. [6]

Other characteristics of the EU aggravate the crisis. The Union’s budget is small and the transfer of means towards the weaker economies is very limited. In comparison, if the United States had the same constraints and the transfer of means from the federal government to state governments was as weak as in the EU, about a dozen states of the USA would be in the same situation as Greece and Portugal: Virginia, Maryland, New Mexico, Florida...

The weaker economies of the eurozone that have commercial deficits with the stronger economies (Germany, France, Netherlands, Belgium, Austria...) do not have the possibility of regulating their exchange rates in order to favor their exportations. The eurozone has become a straight jacket. This is why the idea of dropping the Euro has been raised across all political tendencies.

The crisis of the eurozone and beyond of the EU is well established. It is well known that fish start rotting from the head. The crisis crosses all the centralizing bodies of the EU and the eurozone, the governments disagree on measures that would be necessary. Nicolas Sarkozy and Angela Merkel disagree on the steps to take. The German government is favorable to a greater reduction of the value of Greek bonds, whilst the French insist on reducing no further than the 21% agreed on the 21 July following the proposition put forward by the International Finance Institute, the cartel of the banks which are the principal creditors to Greece. In clear opposition to the German government, Josef Ackermann, president of said cartel and executive director of the Deutsch bank, insisted, during the annual reunion of the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
in Washington at the end of September 2011, that he was opposed to any reviewing of the 21% reduction limit. He hammered out “If we now start reopening this Pandora’s box we will lose a lot of time [7]. So we see disagreement between governments [8] but cohesion in the position of the bankers for the time being. The EU and eurozone crisis is also felt directly in the institutions: Jürgen Stark, German administrator of the ECB, resigned angrily in September 2011, expressing publicly his disagreement with the policies of Jean-Claude Trichet, particularly with the purchase by the ECB of Greek and Italian bonds, amongst others.

Meanwhile, the British government maintains its autonomous positions. Pleased it had not entered the eurozone, it has the possibility of managing the exchange rate of the pound. Although the United Kingdom has a greater public debt than Spain, the British government has much greater leeway on its monetary policies than the Spanish government. The British government is opposed to the majority of the other European governments over the creation of the “Robin Hood tax”. If it ever does exist, it is probable that it will be applied only in the eurozone countries. [9] The British government is also seriously considering prosecuting the ECB for obstruction to the free movement of capital, if it rules that companies who do big transactions in Euros must be domiciled in the eurozone. This would not be in the interest of the City of London as a tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
. [10]

Among the governments of eurozone countries, some, such as the Slovaks and the Finns, have expressed doubts concerning the 21 July agreement, producing a climate of incertitude as to whether this agreement will eventually be ratified by these governments.

The eurozone debt crisis had another victim in July 2011, that was hardly mentioned by the media and the EU leaders. Cypriot banks have been hit directly by the Greek crisis. The principal reason for this silence is that Cyprus, seeing the effects of the austerity measures imposed on Greece, Ireland and Portugal, wants to get out of its fix without asking for Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

(European Commission, ECB and IMF) assistance, preferring to engage negotiations with Russia for a loan of 2 billion euro. The Italian government is also attempting to avoid the bullying of the Troika by asking China to increase its purchases of Italian bonds.

The events of 2007-2008 did not at all lead governments to impose strict prudential rules. However, measures to prevent financial institutions (banks, insurance companies, pension funds, hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. , etc.) from further undermining our economy must be taken. Governments and CEOs, that are directly or indirectly responsible for banking and stock exchange collapses, must be prosecuted. In the interest of the vast majority of the population, it is urgent to expropriate the banks and make sure they serve the common good, by nationalizing them and putting them under workers’ and citizens’ control. Not only should we refuse any compensation to major shareholders, but we should demand that these same shareholders pay for the cost of sanitizing the financial system. We must also repudiate the illegitimate debts that private banks claim from governments. Of course, a number of complementary measures must be implemented, such as controlling capital flow, prohibiting speculation and transactions with tax and judiciary havens, and the creation of a tax system geared towards social justice... In the context of the European Union, treaties such as those of Maastricht and Lisbon must be abrogated. The statutes of the European Central Bank must be radically changed. While the crisis has not yet reached its peak, it is high time to take a U-turn and enforce an anti-capitalist outcome to the banking and stock exchange turmoil.

Translated by Christine Pagnoulle and Mike Krolikowski

* The present article completes the series of seven instalments ‘In the eye of the storm

Éric Toussaint is Ph D in political sciences from the universities of Liège and Paris VIII; he is president of the CADTM Belgium, a member of the presidential Commission for an integral debt audit in Ecuador, and a member of ATTAC France’s scientific council.
With Damien Millet he edited ‘La Dette ou la Vie’, Aden-CADTM, 2011. Contributed to ATTAC’s book ‘Le piège de la dette publique. Comment s’en sortir’, Les liens qui libèrent, Paris, 2011.


[1Obviously the public debt crisis is very serious and calls for radical solutions but it is important to stress the fact that the crisis of private banks does not result from the public debt crisis, quite the opposite.

[2Dexia was bailed out by the joint action of the French, Belgian and Luxembourg governments in October 2008. This costly intervention did not change anything to the managerial structure and the functioning process of this bank that had been privatized in the 1990s.

[4See Financial Times ‘Central banks walk a monetary tightrope,’ 23 September 2011, see also in the same edition: ‘Italy: Fight for credibility continues.’ The total amounts that were bought by the ECB between May 2010 when it started buying Greek bonds on the secondary market and 12 September 2011 was EUR 143 billion. In May 2010 and March 2011 the ECB had bought Greek bonds for EUR 66 billion. Then it stopped buying any until 8 August 2011. See on this : Eric Toussaint ‘The ECB, ever loyal to private interests’,

[5In September 2011, nearly half of the eurozone public debt (totalling 6500 billion euro) is considered a bad risk. This now includes Belgian public debt which represent 5% of the eurozone public debt. The Greek part is 4%, Portugal 2% Irland 1% Spain 9% and Italy 26%! (See Martin Wolf, « Fear and loathing in the eurozone », Financial Times, 28 septembre 2011).

[6Financial Times, « Central banks walk a monetary tightrope », 23th September 2011. One of the big flaws in the Fed policy is to have bought toxic assets from private financial institutions (related to the subprime market) for a total of 1.25 trillion dollars and to have lent astronomical amounts to these same institutions to keep them afloat whereas the state should have expropriated them.

[7See Financials Times, « IMF/World Bank meetings : Debt talks fail to agree solution », 26th September 2011.

[8See Financial Times, « Splits over Greek bail-out », 28th September 2011.

[9This would be sufficient to create the critical mass. The problem with this tax is its timidity..

[10See Financial Times, 14 septembre 2011

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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