Here’s an extract from Standard & Poors’ statement titled ‘Belgium’s Dexia Bank ‘A-/A-2′ Ratings Affirmed, ‘A-’ Rating Off Watch On Reduced Dexia Group Exposure; Outlook Negative‘ (released today) on Dexia Bank, based in Belgium.
The raising of the subordinated debt ratings follows our revised assessment of Dexia Bank’s stand-alone credit profile (SACP) to ‘bbb-’ from ‘bb+’, owing to the bank’s improved risk position and liquidity.
The long-term rating on Dexia Bank is three notches higher than the SACP. We apply one notch of uplift, which brings the SACP to ‘bbb’ from ‘bbb-’, to factor in our view of the Belgian government’s willingness to provide short-term extraordinary liquidity to Dexia Bank if needed. We then add two further notches of support because we consider that Dexia Bank has “high” systemic importance in Belgium and the government’s “supportive” stance toward the domestic banking sector.
Basically, without Belgian state support, the bank would be rated bb+, but because of the “Belgian government’s willingness to provide short-term extraordinary liquidity”, their rating is A-. More importantly, the support implied from the Belgian government doesn’t show on any kind of debt-to-GDP ratio or balance sheet.
This house of cards is the current state of the European banking system – insolvent banks supported by state money that is being treated as though it will appear out of thin air when it’s needed.