Dexia said today its Belgian subsidiary will be bought by the state for 4 billion euro (£3.5bn) as part of a restructuring of the bank amid a severe liquidity squeeze.

Dexia is the first large European bank to need a state bailout since the financial crisis of 2008, after it came under intense funding pressure due to its exposure to highly indebted eurozone states like Greece, Italy and Spain.

On top of the nationalisation, the governments of Belgium, France and Luxembourg will together provide an additional 90 billion euro (£77.7bn) in funding guarantees for the bank for up to 10 years.

Belgium will provide 60.5% of these guarantees, 36.5% will come from France and the remaining 3% from Luxembourg.

At the same time, Dexia's board is in negotiations with French banks Caisse des Depots et Consignations and La Banque Postale to find a solution to the financing of French local authorities, in which Dexia played an important role.

Dexia said backing from the Caisse des Depots would reduce its short-term funding requirement by almost 10 billion euro (£8.6bn).

Belgium's caretaker prime minister Yves Leterme said that the support from the state ensures that all of Dexia's clients "can be sure and certain that their money is in full security at Dexia Belgium".

The announcement followed marathon negotiations between the three governments and the bank's management.

Officials were worried that a collapse of the bank would exacerbate an already tight funding environment for banks in Europe, as analysts warn of a credit crunch similar to the one that followed the collapse of Lehman Brothers.

At the same time, the Belgian and French governments were concerned that putting up more money for bank bailouts would threaten their credit rating and drive up interest rates on their bonds.

Belgian finance minister Didier Reynders said that the country's debt would remain below 100% of economic output despite the bailout.

Source: http://www.independent.co.uk/news/world/europe/belgium-nationalises-dexia-unit-2368322.html