Belgium: KBC Bank Comes Back for Thirds - Another

UNCLAS BRUSSELS 000720


STATE FOR EEB/IFD/OMA, EUR/ERA AND EUR/WE
Treasury for OASIA/OIN - Atukorala
USDOC FOR 3133/USFCS/OIO/EUR

E.O. 12958: N/A
TAGS: EFIN EINV ELAB BE
SUBJECT: Belgium: KBC Bank Comes Back for Thirds - Another
Government Bailout

Summary
--------------


1. The Government of Belgium (GOB) provided a third bailout to
Kredietbank (KBC),Belgium's third largest bank, on May 15,
announcing it would provide cash of 2 billion euro and the
possibility of loan guarantees worth almost 15 billion euro. KBC
received earlier bailouts in October 2008 (3.5 bn euro) and January
2009 (2 bn euro),the latter provided by the regional government of
Flanders. KBC thought it had cleaned up its balance sheet in
January, but a February 2009 downgrading of US reinsurer MBIA forced
KBC to mark down the value of certain assets. This latest
transaction could end up bringing the combined federal and Flemish
regional governments' total ownership of KBC to 28 percent. This
latest intervention hammers home how deeply the financial crisis has
hit Belgium's financial sector and the federal government, which has
now injected over 25 billion euro (nearly 7 percent of Gross
Domestic Product, or GDP) into the country's three largest banks,
and possibly up to approximately 315 billion euro in loan
guarantees. End summary.


2. On May 15, Kredietbank (KBC),the largest bank in the Flanders
region of Belgium, announced a first-quarter loss of 3.6 billion
euro, higher than expected. After three weeks of behind-the-scenes
negotiations with KBC officials, the Belgian government (GOB) and
the Commission of Banking and Finance, Prime Minister Herman Van
Rompuy on May 15 announced the third rescue package for KBC in the
last six months. The GOB had provided a 3.5 billion euro injection
in October 2008, and the Flemish Government provided the second
injection, amounting to 2 billion euro, in January 2009.


3. Although after the second rescue KBC had proudly declared that
all dubious credits had been written off, the Flemish bank
apparently ran into difficulty this time around due to the recent
downgrading of the U.S. based reinsurer MBIA. This move forced KBC
and a host of other banks to cut seriously into the value of some of
the collateralized debt obligations (CDOs) in their portfolio
insured by MBIA. This has also prompted KBC and 15 other banks to
recently sue MBIA before a New York court, alleging that the credit
reinsurer deliberately set up a 'good bank/bad bank' construction
that was detrimental to its foreign clients.


4. The package announced May 15 by Belgian Prime Minister Van Rompuy
consists of several tranches. A first tranche of 1.6 bn. euro in
losses will be borne by KBC itself. A second tranche of eventual
losses of 2 bn. euro will be borne by the GOB or the Flemish
regional government, if KBC is not capable of finding fresh capital
among its current shareholders. This could mean that the public
sector (either the federal or Flemish regional government) could
ultimately own up to 28 percent of the bank's capital. If after
that second intervention KBC were to need even more cash, the GOB
has provided an additional guarantee of euro 14.8 bn to be made
available. It is still unclear when the expiration deadline for
that guarantee is.


5. All these government guarantees and capital injections come at a
hefty price for KBC, possibly costing KBC as much as 890 million
euro per year until 2016. These revenues flowing to the GOB and/or
Flemish government need to be offset against the cost of the loans
the GOB and the Flemish regional government had to take out to
finance the rescues of the three 'systemic' Belgian banks, Fortis,
Dexia and KBC. Earlier banking rescues for Dexia are expected to
net the GOB an additional 500 million euro per year, as well as 30
million euro per year plus 11.6 percent ownership of BNP Paribas in
the case of the GOB's rescue of Fortis Bank.


6. To date, the Belgian Government and the Flemish regional
government have spent a total of 21.64 bn euro in capital support
for KNC, Fortis and Dexia banks, while promising to cover another
25.16 bn euro in potential extra costs. On top of that, the public
sector has pledged to guarantee a total of 95 bn euro of loans that
the three banks can make.


7. Comment: During the talks leading up to the GOB bailout of KBC
(and about which the Flemish Government was kept in the dark),the
stock price of KBC initially increased by 25 percent but then
dropped dramatically two days before the announcement of the deal by
the Prime Minister. On May 15 alone KBC shares lost 40 percent of
their value. Because of that, the Commission of Banking and Finance
(CBFA),the Belgian financial watchdog, has already started an
investigation to see whether insider trading has occurred. But the
CBFA itself is also under fire as to why it kept KBC's latest
problems so long under a shroud of secrecy.


8. Comment continued: This latest episode has badly tainted KBC's
credibility, since the bank in January declared that it had seen the
worst and had no more financial skeletons in its closet. But then
the MBIA downgrade occurred in February, and KBC remained silent
about it for another three months. It seems obvious that some heads
will have to roll at the bank, while it simultaneously will have to
shed some of its unprofitable operations in Eastern Europe, most
notably in Russia, Slovenia and Serbia. End comment.

Bush