Dexia rescue takes edge off market turmoil

By Philip Blenkinsop and Ingrid Melander

BRUSSELS (Reuters) - EU regulators on Tuesday cautiously endorsed a 6.4 billion euro (5.09 billion pound) public bailout of Belgian-French financial services group Dexia (DEXI.BR) (DEXI.PA), providing a measure of relief for markets roiled by the deepening global banking crisis.

After all-night negotiations convened just days after the rescue of Dutch-Belgian rival Fortis, the Belgian government announced that it and other stakeholders would invest 3 billion euros in Dexia, the French government 1 billion euros and French state-controlled Caisse des Depots (CDC) 2 billion.

The Luxembourg government would also invest 376 million euros in Dexia, created in the 1990s out of Belgian and French municipal lenders.

Dexia's shares, which fell by nearly 30 percent on Monday, rose sharply after the European Commission expressed confidence the terms of the rescue respected state aid rules and Dexia's chief financial officer said the new funding had boosted the bank's Tier 1 capital ratio to around 14 percent.

At 10:50 a.m. BST the share was trading up 13.93 percent at 8.10 euros.

Shares in Europe's top banks had slumped after the Dexia news and the unexpected rejection by U.S. lawmakers of a $700 billion (387 billion pound) bailout plan for the financial industry. Credit Agricole (CAGR.PA) fell over 5 percent, but recovered after the Commission's endorsement of the Dexia plan to gain 1 percent by 11:08 a.m. BST.

Dexia had a core of shareholders holding 51.9 percent of the company, including French state-controlled Caisse des Depots (CDC) with 11.7 percent and Belgium's communal holding group with 16.2 percent.

French President Nicolas Sarkozy's office said the rescue would give CDC more than 25 percent of Dexia, a blocking minority under Belgian law.