REUTERS

The logo of Belgian-French financial services group Dexia is seen at the bank headquarters in central Brussels October 4, 2011.

Worried depositors withdrew funds and overloaded the customer helpline of struggling bank Dexia on Wednesday as governments raced to put a rescue plan in place and stop its troubles from worsening the euro zone debt crisis.

One French politician also expressed concern that the problems facing Franco-Belgian Dexia, a key player in municipal funding, might contaminate other banks and hit already tight financing for local authorities.

Belgium and France expect to finalise by Thursday a rescue plan for the bank, now in need of support for a second time in just a few years because of its exposure to Greek debt and trouble accessing wholesale funds.

“We have had some customers taking money out, but it has been limited,” a Dexia spokeswoman said. “We have faced many questions and we have been explaining the situation a lot.”

Dexia's customer helpline began with a warning that its system was 'overloaded'. Otherwise, there was no obvious sign of panic, or indeed any queues, at Dexia's branches in Brussels on Wednesday morning.

“I am not withdrawing any money, as a matter of fact, I just deposited some,” one customer said.

It's all very confused,” said Claude Bartolone, a French Socialist lawmaker for the Seine Saint-Denis department north of Paris.

“We urgently need details on the construction that is being prepared. It would be unacceptable to contaminate the Banque Postale and especially the Caisse des Depots, given the trust that exists between it and local governments.”

He added that the rescue of Dexia had come at a very difficult time for the funding of local authorities, citing a cocktail of tougher Basel III capital requirements and volatility on the interbank lending market that had further tightened the screws on many banks.

SHARES RECOVER

Dexia's shares hit an all-time low on Tuesday but recovered some ground on Wednesday as the Franco-Belgian rescue plan appeared to be taking shape.

“I think that tomorrow a solution should be found,” France's finance minister, Francois Baroin, told RTL radio on Wednesday. He repeated that Dexia could not keep its current shape. “It is indisputable.”

Belgian newspaper De Tijd reported customers had gone into Belgian branches to withdraw 300 million euros ($398 million) from Dexia accounts. This excluded online transactions. Dexia in Belgium holds some 80 billion euros of deposits.

Belgium's prime minister and finance minister have said Dexia savings were safe, with a government guarantee of 100,000 euros per account holder.

“Dexia clients saved” was the headline on top-selling Flemish newspaper Het Laatste Nieuws.

Three years after Fortis was broken apart by Belgium, the Netherlands and France's BNP Paribas, Belgians are aware that a bank can go under, destroying shareholder value, but without touching customer deposits.

BELGIUM'S BORROWING COSTS RISE

Under the rescue plan, the lender to thousands of French and Belgian towns, which also needed propping up after the 2008 crisis, will see its French municipal financing arm broken off and combined with French state bank Caisse des Depots and Banque Postale, the banking arm of the French post office.

Baroin said such a solution would be “most solid”.

Belgium's caretaker prime minister, Yves Leterme, said nationalisation of the banking activities, including a large retail operation, was being considered.

“One of the possibilities to consolidate Dexia Bank Belgium is, at a certain point, to ensure that it is taken up by the government,” Leterme told Belgian station Radio 1.

Leterme also said guarantees Belgium planned to provide Dexia did not represent a risk for the country and, while nationalisation would hit public sector debt, the increase would be “quite limited”.

However, Belgian government bonds underperformed their German counterparts partly due to concerns that Belgium would face a hefty bill for Dexia. The 10-year yield spread rose to 2.22 percent, a three-week high.

Bank of France Governor Christian Noyer said speculation that support of Dexia would threaten France's AAA credit rating were “exaggerated and inexact”.

French banks, he said were generally in good health and central banks of Belgium and France would ensure Dexia had enough liquidity. “We will loan Dexia as much as it needs,” Noyers told Europe 1 radio.

Dexia shares were 7.1 percent higher in midsession trading, albeit 25 percent down this week and 56 percent lower in the year to date.

French banks also rallied, helped by an agreement among EU finance ministers to safeguard banks from the spreading sovereign debt crisis. Credit Agricole shares were the strongest in the FTSEurofirst 300 index , up 9.7 percent. BNP Paribas shares were 6.1 percent stronger. - Reuters