S&P cuts rating on Dexia unit FSA

NEW YORK (Reuters) - Standard & Poor's on Tuesday cut its long-term counterparty credit rating on Financial Security Assurance Holdings Ltd (FSA), the U.S. monoline insurer and unit of Belgium-based banking group Dexia S.A.

S&P cut the rating by one notch to 'AA-, or fourth-highest investment grade, in line with a cut to Dexia's ratings made Monday.

The agency earlier revised its outlook on the ratings of the core entities of Dexia to 'stable' from 'negative' after the bank received a 6.4 million euro capital injection from the governments of France, Belgium and Luxembourg.

The improved outlook for Dexia Credit Local, Dexia Bank S.A., Dexia Banque Internationale a Luxembourg and Dexia Crediop SpA, "reflects our expectations that further government support could take place in case of need," S&P analyst Taos Fudji said in a statement.

The government rescue came after Dexia (DEXI.BR) shares shed almost 30 percent of their value on Monday, battered by a report that the company needed fresh capital.

The bank denied the report, but its response failed to brake the slide in its share price.

Fudji on Monday cut his long-term counterparty credit ratings on Dexia and its core entities, citing the group's exposure to the U.S. housing downturn.

"In our view, the injection provides a very strong cushion against possible higher-than-expected impairments both in Dexia's securities portfolio and at U.S. subsidiary Financial Security Assurance Inc., " said Fudji.

Dexia's exposure to the U.S. housing market is through FSA which backs about $18 billion (10.1 billion pounds) of non-agency U.S. mortgage-linked structured credits.