EN Official Journal of the European Union L 110/1

COMMISSION DECISION

of 28 December 2012

on State aid SA.33760 (12/N-2, 11/C, 11/N); SA.33763 (12/N-2, 11/C, 11/N); SA.33764 (12/N-2, 11/C, 11/N); SA.30521 (MC 2/10); SA.26653 (C9/09); SA.34925 (12/N-2, 12/C, 12/N); SA.34927 (12/N-2, 12/C, 12/N); SA.34928 (12/N-2, 12/C, 12/N) implemented by the Kingdom of Belgium, the French Republic and the Grand Duchy of Luxembourg in favour of Dexia, DBB/Belfius and DMA

(notified under document C(2012) 9962)

(Only the French text is authentic)

(Text with EEA relevance)

(2014/189/EU)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof (1),

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the said articles (2), and having regard to those comments,

Whereas:

1. PROCEDURE

1.1. PROCEDURE PRIOR TO THE CONDITIONAL AUTHORISATION DECISION

(1) By decision of 19 November 2008 (3), the Commission decided not to raise any objections to the emergency measures concerning a liquidity assistance operation (‘the LA operation’) and a guarantee for certain of Dexia’s liabilities (4). The Commission considered these measures to be rescue aid for an enterprise in difficulty and therefore compatible with the internal market on the basis of Article 107(3)(b) TFEU, and authorised these measures for a period of six months from 3 October 2008, specifying that after that time the Commission would have to re-evaluate the aid as a structural measure.

(2) An initial restructuring plan for Dexia was notified to the Commission by Belgium, France and Luxembourg (‘the Member States concerned’) on 16, 17 and 18 February 2009 respectively.

(3) By decision of 13 March 2009, the Commission decided to initiate the procedure laid down in Article 108(2) TFEU in respect of all the aid measures granted to Dexia (5).

(4) By decision of 30 October 2009 (6), the Commission authorised the prolongation of the guarantee until 28 February 2010 or until the date of the Commission decision concerning the compatibility of the aid measures and the restructuring plan for Dexia.

(5) On 9 February 2010, the Member States concerned forwarded information to the Commission on the additional measures planned to supplement the initial restructuring plan for Dexia.

1.2. THE CONDITIONAL AUTHORISATION DECISION AND THE MONITORING OF ITS IMPLEMENTATION

(6) By decision of 26 February 2010 (7) (‘the conditional authorisation decision’), the Commission approved the restructuring plan for Dexia and the conversion of the emergency aid into restructuring aid subject to compliance with all the commitments and conditions set out in that decision.

(7) The aid granted to Dexia from September 2008, approved by the Commission in its conditional authorisation decision, comprised: 1. a recapitalisation of a total of EUR 6 billion, EUR 5,2 billion of which could be imputed to the French and Belgian States and was deemed to be aid (the remaining EUR 0,8 billion did not constitute aid as it could not be imputed to the Member States concerned); 2. a guarantee by the French and Belgian States in respect of an impaired asset portfolio, the aid component of which was assessed at EUR 3,2 billion; 3. an emergency liquidity assistance (‘ELA’) operation by the Banque Nationale de Belgique (‘BNB’ — National Bank of Belgium) guaranteed by the Belgian State and drawn down in essence between October and November 2008; and 4. a guarantee by the Belgian, French and Luxembourg States in respect of the refinancing of the Group of a maximum amount of EUR 135 billion (8).

(8) In order to monitor the proper implementation of the commitments and conditions, an independent trustee acting on behalf of the Commission (‘the independent trustee’) and able to carry out all the necessary checks, was to submit a detailed report to the Commission every six months.

(9) In his report of 30 November 2010, the independent trustee considered that three commitments had not been complied with: 1. the obligation to notify the Commission in advance of any payment of coupons on Tier 1 or Upper Tier 2 hybrid instruments issued before 1 February 2010, as provided in Article 2(2) of the conditional authorisation decision; 2. the prohibition on Dexia, pursuant to point 3 of its commitments, to lend to its customers in the public or semi-public sector (9) at a ‘Risk Adjusted Return On Capital’ (‘RAROC’) level of less than a minimum of 10 %; and 3. the obligation, pursuant to point 13(c) of the commitments, taken in conjunction with paragraph 8 of the mandate contract, that the purchaser of the subsidiary AdInfo be independent from Dexia and in a position to correct the distortions of competition discussed in Section 4 of the Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (‘the Bank Restructuring Communication’) (10).

(10) In his report of 29 April 2011, the independent trustee considered that, in addition to the failures of compliance noted in his report of 30 November 2010, four commitments had not been complied with: 1. Dexia had again failed to comply with the conditions laid down in Article 2(2) of the conditional authorisation decision concerning the obligation to notify the Commission in advance of any payment of coupons on Tier 1 or Upper Tier 2 hybrid instruments issued before 1 February 2010; 2. of a sample of 2 805 loans, [80-150] (11) loans concluded between 1 July 2010 and 31 December 2010, of a total value of over EUR [0,5-1,5] billion, had a RAROC of less than 10 %, breaching point 3 of the commitments; 3. the stable funding ratio at 31 December 2010 was not above the level of 40 % required by point 5(c) of the commitments; and 4. on 31 December 2010, Dexia’s consolidated balance sheet total, adjusted to take account of the change in the market value of the derivatives included in Dexia’s balance sheet, was some EUR [10-20] billion greater than the ceiling of EUR [510-550] billion laid down in point 14(a) of the commitments and Annex II to the conditional authorisation decision. On the same date, the balance sheet total of the ‘Core Division’ was some EUR [10-20] billion greater than the ceiling of EUR [390-410] billion laid down in point 14 of the commitments and Annex II to the conditional authorisation decision.

(11) In his report of 26 September 2011, the independent trustee considered that, in addition to the failures of compliance noted in his reports of 30 November 2010 and 29 April 2011, two commitments had not been complied with: 1. of a sample of 1 455 loans, [120-170] loans concluded between 1 January 2011 and 30 June 2011, of a total value of over EUR [0,5-1,5] billion, had a RAROC of less than 10 %, breaching point 3 of the commitments; 2. Dexia Sabadell (12) had, on 28 February 2011, called in a discretionary early repayment option on a Tier 2 instrument (13), breaching point 9(c) of the commitments.

(12) In his report of 22 May 2012, the independent trustee considered that, in addition to the failures of compliance noted in his reports of 30 November 2010, 29 April 2011 and 26 September 2011, three commitments had not been complied with: 1. of a sample of 1 468 loans, [50-100] loans concluded between 1 July 2011 and 31 December 2011, of a total value of over EUR [550-575] million, had a RAROC of less than 10 %, breaching point 3 of the commitments; 2. the level of the stable funding ratio at 31 December 2011 was [30 - < 45] %. It was not therefore above 45 %, as required by point 5(c) of the commitments; and 3. on 31 December 2011, the sale of Dexia Bank Denmark A/S, the Danish subsidiary of Dexia BIL, had not taken place, breaching point 13(g)(ii) of the commitments.

(13) In his report of 5 October 2012 on the implementation of the commitments by Dexia (excluding Dexia Banque Belgique (wholly-owned subsidiary of Dexia SA, ‘DBB/Belfius’) for the whole of the period covered by this report, namely from 1 January 2012 to 30 June 2012), the independent trustee considered that, in addition to the failures of compliance noted in his reports of 30 November 2010, 29 April 2011, 26 September 2011 and 22 May 2012, the commitment relating to the RAROC had not been complied with, breaching point 3 of the commitments. Of a sample of 218 loans, [15-20] loans concluded between 1 January 2012 and 30 June 2012, of a total value of over EUR [100-125] million, had a RAROC of less than 10 %.

(14) In accordance with the conditional authorisation decision, Dexia had undertaken to sell or float on the stock exchange its 70 % holding in its Italian subsidiary, Dexia Crediop, by 31 October 2012. The independent trustee noted in his report of 5 October 2012 that Dexia had not provided any information on the implementation of this commitment during the first half of 2012. On the basis of the information provided for preceding reports, however, the independent trustee continued to believe that Crediop had not […] and was not therefore […] (14).

1.3. PROCEDURES SUBSEQUENT TO THE CONDITIONAL AUTHORISATION DECISION

(15) Since the summer of 2011 Dexia has encountered further difficulties. The Member States concerned have therefore implemented additional aid measures and are envisaging the adoption of new aid.

1.3.1. Procedure relating to the sale and restructuring of DBB/Belfius

(16) On 7 October 2011, the Belgian authorities notified to the Commission the planned acquisition of DBB/Belfius by the Belgian State. On 12 October 2011, Belgium notified to the Commission measures additional to the restructuring plan approved by the conditional authorisation decision, consisting in the acquisition of DBB/Belfius by the Belgian State by purchasing 100 % of the shares of DBB/Belfius from Dexia SA for a price of EUR 4 billion.

(17) By decision of 17 October 2011 (‘opening decision on the sale of DBB/Belfius’) (15), the Commission opened a formal investigation procedure into the measure involving the sale of DBB/Belfius by Dexia and its acquisition by the Belgian State. This measure concerned the acquisition by the Belgian State of DBB/Belfius and its subsidiaries (16), with the exception of Dexia Asset Management (‘DAM’). In the interests of preserving financial stability, the Commission also decided temporarily to approve this measure. It was therefore approved for six months from the opening decision on the sale of DBB/Belfius (namely until and including 16 April 2012) or — if Belgium submitted a restructuring plan for DBB/Belfius within six months of the date of the opening decision on the sale of DBB/Belfius — until such time as the Commission adopted a final decision on the measure. The sale of DBB/Belfius took place on 20 October 2011. On 1 March 2012, the company, known until then as Dexia Banque Belgique, officially announced its new name: Belfius (17). From that date, DBB no longer had any capital links with Dexia.

(18) The Commission received comments from third parties interested in this matter. It forwarded them to Belgium inviting it to comment on them, and received Belgium’s comments by letter dated 19 April 2012.

(19) On 17 April 2012, Belgium submitted a restructuring plan for DBB/Belfius. Between 17 April 2012 and 23 November 2012 there were many meetings, telephone conferences and submissions of additional information.

(20) On 26 November 2012, Belgium notified to the Commission the final version of the restructuring plan for DBB/Belfius.

(21) On 21 December 2012, Belgium notified to the Commission a letter of its commitments in relation to DBB/Belfius.

1.3.2. Procedure relating to the restructuring/resolution of Dexia and the refinancing guarantee

(22) On 18 October 2011, the Member States concerned informed the Commission of a set of potential new measures connected with a new plan for the resolution or dismantling of Dexia. As part of this set of new measures, on 21 October 2011 Belgium notified to the Commission an emergency liquidity assistance (‘ELA’) measure granted to DBB/Belfius by the BNB.

(23) On 14 December 2011, France, Belgium and Luxembourg also notified to the Commission, as part of this set of new measures, a draft temporary guarantee by the Member States concerned in respect of the refinancing of Dexia SA and Dexia Crédit Local (‘DCL’).

(24) By decision of 21 December 2011 (‘the temporary approval decision’) (18), in the interests of preserving financial stability, the Commission decided temporarily to approve the temporary refinancing guarantee until 31 May 2012. However, in that decision, the Commission opened a formal investigation procedure in relation to all the additional measures for the restructuring of Dexia since the adoption of the conditional authorisation decision (including the temporary refinancing guarantee) in view of the fact that the temporary refinancing guarantee, the acquisition of DBB/Belfius by Belgium and the failures to comply with the commitments and conditions of the conditional authorisation decision represented a substantial modification of Dexia’s restructuring conditions.

(25) On 23 March 2012, Luxembourg notified the Commission of the sale of Dexia Banque Internationale à Luxembourg (‘Dexia BIL’). Some assets were excluded from the scope of the sale. Precision Capital SA — a Qatari investment group — was to acquire 90 % of Dexia BIL, and the remaining 10 % was to be acquired by the State of Luxembourg. By decision of 3 April 2012 (19), the Commission opened a formal investigation procedure into the sale of Dexia BIL. By decision of 25 July 2012 (20), the Commission authorised the sale of Dexia BIL.

(26) On 21 and 22 March 2012, the Member States concerned notified to the Commission an initial orderly resolution plan for Dexia (‘the initial orderly resolution plan for Dexia’).

(27) On 25 May 2012, the Member States concerned notified to the Commission a request to extend the issue window for the temporary refinancing guarantee until 30 September 2012.

(28) On 31 May 2012, the Commission adopted two decisions.

(29) In the first decision (‘the decision to extend the procedure’), it decided to extend the formal investigation procedure to all the additional measures for the restructuring of Dexia, in order to examine the initial orderly resolution plan for Dexia submitted by the Member States concerned on 21 and 22 March 2012 (21). It also invited the Member States concerned to submit their comments and to provide any information on the recapitalisation of Dexia by Arcofin relevant to establishing whether or not the conditional authorisation decision should be revoked (see recitals 41 and 42 below).

(30) In the second decision (‘the decision on the first prolongation of the guarantee’) (22), the Commission temporarily approved, until such time as it adopted a final decision on the orderly resolution plan for Dexia, an initial prolongation to 30 September 2012 of the issue window for the temporary guarantee by the Member States concerned in respect of the refinancing of Dexia SA and DCL, and at the same time extended the formal investigation procedure in respect of all the additional measures for the restructuring of Dexia opened by the temporary approval decision to this measure.

(31) On 5 June 2012, the Member States concerned notified to the Commission an increase in the guarantee ceiling to the maximum amount of EUR 55 billion in principal. In its decision of 6 June 2012 (23) (‘the decision to increase the guarantee ceiling’), the Commission temporarily approved the increase in the guarantee ceiling, until such time as it adopted a final decision on the orderly resolution plan for Dexia, and extended the formal investigation procedure in respect of all the additional measures for the restructuring of Dexia opened by the temporary approval decision to include this measure.

(32) On 7 September 2012 the Member States concerned notified to the Commission a request for a second prolongation to 31 January 2013 of the issue window for the temporary refinancing guarantee (with a guarantee ceiling of a maximum amount of EUR 55 billion in principal). In its decision of 26 September 2012 (24) (‘the decision on the second prolongation of the guarantee’), the Commission temporarily approved, until such time as it adopted a final decision on the orderly resolution plan for Dexia, the second prolongation of the issue window for the temporary guarantee by the Member States concerned in respect of the refinancing of Dexia SA and DCL until 31 January 2013, and extended the formal investigation procedure to include this measure.

(33) On 26 November 2012, Belgium notified to the Commission the final version of the restructuring plan for DBB/Belfius. On 17 December 2012, Belgium notified a letter of commitments in relation to the restructuring of DBB/Belfius.

(34) On 14 December 2012, the Member States concerned notified to the Commission a new orderly resolution plan for Dexia (‘the revised orderly resolution plan for Dexia’), to replace the initial orderly resolution plan for Dexia.

(35) On 14 December 2012 the Member States concerned notified to the Commission a memorandum entitled ‘Memorandum from the French authorities to the European Commission’ relating to a ‘Presentation of the affiliation of DMA to the State, the Caisse des Dépôts et Consignations and La Banque Postale’ (‘the memorandum on the disposal of DMA’).

(36) On 17 December 2012 the Member States concerned also notified a letter of commitments relating to the revised orderly resolution plan for Dexia and a letter of commitments relating to the operation to dispose of Dexia Municipal Agency (‘DMA’).

1.3.3. Procedure relating to the revocation of the conditional authorisation decision

(37) In recital 104 of the conditional authorisation decision, the Commission noted that the Member States concerned considered that the decision by certain historical shareholders of Dexia, such as Arcofin, to participate in the bank’s capital increase did not contain any State aid elements. In recital 130 of the decision, the Commission considered that the resources made available to Dexia as a result of the steps taken by Arcofin were not State resources. The Commission therefore concluded that Arcofin’s investment in Dexia did not constitute State aid as that operation did not satisfy one of the criteria of Article 107(1) TFEU.

(38) On 7 November 2011, the Belgian authorities notified the extension of a State guarantee scheme applicable until then to bank deposits and ‘branch 21’ life insurance. Under this extension, individual member shares in approved financial cooperatives were also to be covered by the State guarantee.

(39) The Commission subsequently became aware of information suggesting that Arcofin’s investment in Dexia could have been made possible by the assurances — at the same time as Arcofin’s investment in Dexia — by the Belgian authorities that Arcofin members would be protected against any risk of losses (see Section 3.1.2, recitals 397 to 399 below). This could mean that Arcofin’s recapitalisation of Dexia involved State resources and entailed State aid.

(40) By a letter dated 6 December 2011, the Commission informed the Belgian State that the extension of the guarantee scheme could constitute illegal State aid and asked Belgium to refrain from any further steps to implement this measure. On that occasion, it mentioned the possibility of adopting, pursuant to Article 11 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (25) (‘the Procedural Regulation’), a decision requiring the Member State to suspend the guarantee scheme, i.e. to take no further measures to implement the scheme. In this letter, the Commission invited Belgium to submit its comments on this matter, which it did in a letter dated 22 December 2011.

(41) On 11 April 2012, the Commission sent the Member States concerned a letter informing them of its intention to open a formal investigation procedure with a view to revoking all the parts of the conditional authorisation decision relating to Arcofin’s participation in Dexia’s capital increase. This letter drew on information suggesting that Arcofin’s participation in Dexia’s recapitalisation could in practice be attributed to the Belgian State following the assurance that it had given that it would guarantee the individual member shares in approved financial cooperatives such as Arcofin.

(42) On 16 May 2012, the Member States concerned replied in a letter to the Commission that there were no grounds for opening the formal investigation procedure and/or revoking the conditional authorisation decision, arguing that Arcofin’s participation in Dexia’s recapitalisation did not involve State resources. In the decision to extend the procedure, the Commission opened the formal investigation procedure into Arcofin’s participation in Dexia’s capital increase, inviting the Member State concerned to provide any information relevant to establishing whether or not the conditional authorisation decision should be revoked in respect of Dexia’s recapitalisation by Arcofin.

1.3.4. Implementation of the conditional decision

(43) The Commission notes, moreover, that the conditional authorisation decision had not been correctly implemented. As described in further detail in Section 1.2.2 of the decision to extend the procedure, the independent trustee had noted on a number of occasions that Dexia had failed to comply with certain commitments set out in the restructuring plan subject to which the State aid granted to Dexia was deemed to be compatible with the internal market. In his reports of 30 November 2010, 29 April 2011, 26 September 2011 and 22 May 2012, the independent trustee had in particular observed that the following commitments had not been complied with: (a) the obligation to notify the Commission in advance of any payment of coupons on Tier 1 or Upper Tier 2 hybrid instruments issued before 1 February 2010, as provided in Article 2(2) of the conditional authorisation decision; (b) the prohibition on Dexia, pursuant to point 3 of the commitments, to lend to its public or semi-public sector customers at a Risk Adjusted Return On Capital (‘RAROC’) level of less than a minimum of 10 %; (c) the obligation, pursuant to point 13(c) of the commitments, read in conjunction with paragraph 8 of the mandate contract, that the purchaser of the subsidiary AdInfo be independent from Dexia and in a position to correct the distortions of competition discussed in Section 4 of the Bank Restructuring Communication (26). (d) the stable funding ratio at 31 December 2010 was not above the level of 40 % required by point 5(c) of the commitments; and the level of the stable funding ratio at 31 December 2011 was [30 - < 45] %. It was not therefore above 45 %, as required by point 5(c) of the commitments; (e) on 31 December 2010, Dexia’s consolidated balance sheet total, adjusted to take account of the change in the market value of the derivatives included in Dexia’s balance sheet, was some EUR 14 billion greater than the ceiling of EUR [510-550] billion laid down in point 14(a) of the commitments and Annex II to the conditional decision. On the same date, the balance sheet total of the ‘Core Division’ was some EUR [10-20] billion greater than the ceiling of EUR 401 billion laid down in point 14 of the commitments and Annex II to the conditional decision; (f) at 31 December 2011, the sale of Dexia Bank Denmark A/S, the Danish subsidiary of Dexia BIL, had not taken place, breaching point 13(g)(ii) of the commitments.

(46) Following these failures by Dexia to comply with the commitments described above, the Commission, in the decision to extend the procedure, opened the formal investigation procedure. In that decision, the Commission pointed out that it had, because of the failures to comply with these conditions, to re-evaluate the compatibility of all the aid covered by the conditional decision and invited the Member States concerned to submit their comments and provide any information relevant to assessing these aid measures.

1.3.5. Final comments on the procedure

(47) The present Decision closes both the formal investigation procedure opened into the acquisition of DBB/Belfius and the formal investigation procedure opened by the conditional authorisation decision (and extended by the decision to extend the procedure, the decision on the first prolongation of the guarantee, the decision to increase the guarantee ceiling and the decision on the second prolongation of the guarantee, to include the ELA measures, the refinancing guarantee and the underwriting by DBB/Belfius of bonds guaranteed by the Member States concerned and issued by Dexia SA and DCL) on the restructuring and then the revised orderly resolution plan for Dexia, including the DMA sale operation.

2. DESCRIPTION

2.1. DESCRIPTION OF THE DEXIA GROUP AND ITS DIFFICULTIES

2.1.1. General description

(48) The Dexia Group (‘Dexia’) was formed in 1996 by the merger of France’s Crédit Local and Belgium’s Crédit Communal and was specialised in loans to local authorities, but also had some 5,5 million private customers, mainly in Belgium, Luxembourg and Turkey.

(49) Dexia was organised around the parent holding company (Dexia SA) and three operational subsidiaries located in France (DCL) (27), Belgium (DBB) and Luxembourg (Dexia BIL). It in particular included a mortgage lending company, DMA, a subsidiary of DCL. It also had other subsidiaries: Deniz Bank, Dexia Habitat, DKB Polska, DAM, Dexia Région Bail, Dexia Flobail, Dexia Bail, Dexia Israel and Dexia LLD. For a more detailed description of Dexia, the Commission refers to the decision to extend the procedure (28) and the opening decision on the sale of DBB/Belfius (29). Figure 1 Simplified organisation chart of the Group on 30 September 2011 (i.e. prior to the sales announced at the meeting of Dexia’s Board of Directors on 9 October 2011)

(50) From the first quarter of 2010, Dexia combined the instruments subject to run-off management (‘the legacy portfolio’) within a Legacy Portfolio Management Division. On 30 June 2012, the Legacy Portfolio Management Division’s commitments totalled EUR 86,3 billion including off-balance-sheet commitments; balance-sheet commitments totalled EUR 83,9 billion.

(51) The Member States concerned initiated an orderly resolution of Dexia. On 20 October 2011, DBB/Belfius was sold to the Belgian State and, on 31 December 2011, Dexia’s consolidated balance sheet (with the deconsolidation of DBB/Belfius on 1 October 2011) totalled EUR 413 billion. As part of its orderly resolution, Dexia also sold RBC Dexia Investor Services (‘RBCD’) on 27 July 2012, Dexia BIL on 5 October 2012 and Denizbank on 28 September 2012.

(52) In late October 2012, Dexia had the following structure: Figure 2 Structure of the Dexia Group on 24 October 2012

(53) The difficulties faced by Dexia during the financial crisis in autumn 2008 are described in the conditional authorisation decision. Dexia’s more recent difficulties may be summarised as follows.

(54) First, the worsening of the sovereign debt crisis, which many European banks are facing, has increasingly sapped investors’ confidence in bank counterparties with the result that the latter are unable to obtain satisfactory volumes of financing on satisfactory terms.

(55) Furthermore, since the Dexia Group has been particularly exposed to sovereign and quasi-sovereign risk, investors have even less confidence. Dexia’s assets include many loans and/or bonds in countries and/or local and regional authorities in countries perceived as risky by the market.

(56) In addition, the sovereign debt crisis hit before Dexia had time to finalise the implementation of its restructuring plan. As a result of this delay in implementing the restructuring plan, the Group’s liquidity risk profile worsened. This deterioration made Dexia more vulnerable than other European banks to market mistrust.

(57) Dexia’s financing requirements increased markedly for the following reasons: 1. the sharp fall in interest rates during the summer of 2011 increased by at least EUR [5-20] billion the need for additional collateral to cope with the margin calls linked to the variation in the market value of the interest-rate derivatives used to hedge the balance sheet; 2. many bond issues (in particular bonds guaranteed by the Member States concerned previously issued by Dexia) matured at a time when market conditions for refinancing these bonds were not optimal; 3. the substantial fall in market value and decline in the credit quality of the assets that Dexia uses by way of security to obtain financing; 4. the loss of confidence by many investors following, among other things, the announcement of substantial losses in the second quarter of 2011 (almost EUR 4 billion) and downgrades by some rating agencies; 5. Dexia’s difficulties also led the rating agency Moody’s to downgrade DBB/Belfius’ rating on 3 October 2011. This announcement triggered massive withdrawals of customers’ savings from DBB/Belfius in Belgium and Luxembourg totalling EUR several hundred million between 3 and 10 October 2011.

(58) DBB/Belfius, the Group’s central treasury, was particularly badly hit by Dexia’s difficulties from early 2011.

(59) In these circumstances, the Member States concerned initially decided to take other measures to assist Dexia: a new ELA measure granted by the Belgian and French central banks, the grant of a temporary refinancing guarantee and the drawing up of a resolution plan for the Group.

(60) The Member States concerned considered that, despite the measures taken since February 2010, there was a risk of ‘immediate disappearance’ (30) of the residual group that could be offset only by an orderly resolution of the Group.

2.1.2. Description of Dexia Municipal Agency (‘DMA’)

(61) DMA is one of Europe’s leading mortgage lending companies. Its main object is the refinancing of loans or securities via the issue of mortgage bonds, one of the main components of the covered bond market internationally. As a mortgage lending company under the Law of 22 October 2010, DMA issues securitised bonds characterised by the legal privilege pursuant to which sums from its assets are allocated as a priority to payments of bond interest and bond reimbursement.

(62) DMA’s assets exclusively include exposures to eligible public persons such as local authorities or their groupings or public establishments in the European Economic Area, Switzerland, the USA, Canada and Japan. Exposures take the material form of loans or bonds representing receivables from these public persons. DMA’s balance sheet can also include shares of special-purpose vehicles or similar ‘asset-backed security’ (ABS) entities.

(63) DMA’s liabilities include two categories of debt: mortgage bonds and other debts subordinate to those bonds. Assets which are not financed by securitised debt (overcollaterisation) are financed from own funds and from a debt contracted with DCL, DMA’s sole shareholder. The overcollateralisation ratio of mortgage credit companies is calculated as all the asset components (‘cover pool’) related to all privileged debt. DMA undertook to maintain this ratio at a level of 105 % or more in comparison with a statutory minimum of 102 %. Management of DMA operations is entirely the task of its sole shareholder DCL.

(64) The majority of the assets included in DMA’s balance sheet come from the commercial activity of the Dexia Group. The customer portfolio (the ‘cover pool’) was made up on 30 June 2012 of EUR 54,1 billion of loans and EUR 17,6 billion of securities, i.e. a total of EUR 71,8 billion. In terms of its geographical breakdown, France accounted for 65 % of the asset portfolio and other, mainly European, countries for 35 %. The French local authority portfolio was EUR 37 billion and the public health establishment portfolio was EUR 6,6 billion. Table 1 DMA’s customer portfolio DEXMA CUSTOMER PORTFOLIO AT 30 JUNE 2012 IN EUR MILLION Loans Bonds Total Loans/Bonds 54 191 17 650 71 841 France 46 682 372 47 054 State 218 218 Local authorities 36 730 358 37 088 — Regions 2 136 133 2 269 — Départements 6 331 6 331 — Municipalities 18 044 107 18 151 — Groups of municipalities 10 219 118 10 337 Public establishments: 9 734 14 9 748 — health 6 607 6 607 — social housing 2 000 2 000 — other 1 127 14 1 141 Belgium 357 6 499 6 856 Italy 13 7 411 7 424 United Kingdom 1 850 639 2 489 Switzerland 4 087 4 087 Other OECD countries 1 202 2 729 3 931

(65) Some French loans in DMA’s portfolio may be characterised as structured loans. At 31 August 2012, DMA’s French loans (in terms of exposures, contracts and customer numbers) broke down as follows by type of loan (non-structured, structured, non-sensitive and sensitive structured) and according to the Gissler charter classification (31) (see recital 194) which measures the structure risk. Table 2 Classification of loans Classification of loans included in DMA’s balance sheet (at 31 August 2012) Exposures (EUR million) Number of contracts (thousand) Number of customers (thousand) Total 45 907 58,8 19,6 Non-structured loans 29 730 54,9 19,3 Non-sensitive structured loans 6 774 2,5 1,8 Sensitive structured loans 9 404 1,5 0,95 Off-charter 4 189 0,5 0,4 5 E [250-500] [0-0,75] [0-0,75] 4 E [1 000-1 500] [0-0,75] [0-0,75] 3 E [3 000-3 500] [0-0,75] [0-0,75] Other [500-750] [0-0,75] [0-0,75]

(66) DMA had a portfolio of 1 522‘sensitive loans’ whose nominal value was EUR 9,4 billion at 31 August 2012. These loans had a high-leverage structured component. Generally, after an initial period in which the rate to be paid by the customer is fixed and, in most cases, lower than the rate of a vanilla loan maturing at the same time, the structured period of the loan may be triggered. The interest rate to be paid is then directly linked to an underlying index (exchange rate index, exchange parity, etc.) according to a formula whose complexity varies. Many loans are therefore directly indexed to the euro-Swiss franc parity. As a result of the crisis and the very strong progression of the Swiss franc in recent years, the interest rate to be paid is now substantially above the market price.

(67) As a result of the level of some of the interest rates currently being paid, many customers have decided to take action against DMA, citing the following grounds: 1) the lack or erroneous nature of the Annual Percentage Rate (APR), 2) the failure by DCL/DMA to fulfil its duty of information and advice and 3) the nullity of the contract on the ground of absence of consent. On 30 September 2012, 50 customers (a total nominal exposure of some EUR [0-2,5] billion) had taken action against DCL/DMA. At the same time, a number of loans of a total nominal amount of EUR 250 million were in a default situation.

(68) As mentioned above in the description of the decision to extend the procedure, the orderly resolution plan notified to the Commission in April 2012 initially made provision for the introduction of two guarantees: (i) a guarantee against litigation granted by Dexia/DCL to the purchasers of DMA on the portfolio of sensitive loans (that guarantee being counter-guaranteed by the French State) and (ii) a stop-loss guarantee to cover the credit risks of DMA’s portfolio as a whole.

(69) In order to decide whether these guarantees were compatible with State aid rules, the Commission appointed an independent trustee to analyse the sensitive loan portfolio and to assess the losses to be expected. Analysis of these losses (credit risks and risks of litigation-related losses) was based on a number of scenarios of trends in the underlying indices which determine the interest rate payable by the customer. The gap between the interest rate payable and the rate considered to be the ‘market rate’ then made it possible to determine the likelihood of litigation in respect of existing disputes and to construct different outcome scenarios.

(70) On the basis of this analysis commissioned by the Commission, total losses (losses from unpaid amounts and litigation-related losses) for DMA were EUR [1,5-4,5] billion in a baseline scenario and EUR [3-8] billion in a stress scenario. The Member States concerned considered that these losses could be reduced by some 70 % to 80 % if the loans were desensitised.

2.1.3. Description of Crediop

(71) The Italian subsidiary Crediop, in which DCL has a 70 % holding, trades in the Italian market for financial services for the public and semi-public sector (‘Public and Wholesale Banking’ or ‘PWB’) and has a market share of some 20 %. It also finances private projects in various sectors. On 30 June 2012, its loan portfolio was EUR 29,3 billion. As a result of the downgrading of its credit rating, its financial imbalance has worsened and Crediop is now being financed by EUR 5 billion from DCL.

(72) Under the conditional authorisation decision of 26 February 2010, Dexia’s 70 % holding in Crediop was to be sold or floated on the stock exchange before the end of October 2012. This proved not to be feasible, as the independent trustee confirmed (see recital 55 above).

2.1.4. Description of DBB/Belfius

(73) DBB/Belfius trades mainly in the Belgian market for financial services for the public and semi-public sectors (‘Public and Wholesale Banking’ or ‘PWB’), financial services for individuals (‘Retail and Commercial Banking’ or ‘RCB’) and insurance. DBB/Belfius has a market share (32) in Belgium of [10-15] % of PWB loans, 13 % of RCB saving, 15 % of RCB mortgage loans, 9,5 % of life insurance and 5 % of non-life insurance. DBB/Belfius has some 3,8 million customers. DBB/Belfius had a balance sheet total of EUR 233 billion at the end of 2011 and a Core Tier 1 Basel II solvency ratio of 11,8 % at the end of 2011. DBB/Belfius recorded a net loss after taxation of EUR 1,37 billion in 2011.

2.2. DESCRIPTION OF THE ORDERLY RESOLUTION PLAN FOR DEXIA

(74) The revised orderly resolution plan for Dexia in particular includes the disposal of the Group’s saleable entities and the run-off management of all the Group’s other entities and assets.

(75) Under the revised orderly resolution plan, the bond and loan portfolio will in principle be held until maturity in order to preserve its value and avoid ‘fire sales’. Dexia and the Member States concerned will also look into the ways in which the Group could speed up opportunistic deleveraging if market conditions so allow.

(76) The proposed strategy will significantly reduce the size of Dexia’s balance sheet. On 30 June 2012, it had already fallen to EUR 411 billion, i.e. a decrease of over 37 % in comparison with the size of Dexia’s balance sheet on 31 December 2008 (EUR 651 billion), when the first State aid was granted. The Group’s assets should be EUR [200-250] billion at the end of 2013, after the sale of DMA (impact of EUR [60-80] billion), breaking down into PWB loans (EUR [80-100] billion), legacy assets (EUR [60-80] billion), cash collateral (EUR [20-40] billion) and other assets (EUR [40-60] billion). Assets will then be reduced by some EUR [10-20] billion per annum up to 2017. They will be EUR [100-150] billion in 2020, including EUR [50-70] billion in PWB loans (– [30-50] % in comparison with the end of 2013) and EUR [30-50] billion in legacy assets (– [30-40] %). In comparison with 2008, there will be a balance sheet reduction of [70-80] % by 2020. Figure 3 Breakdown of Dexia’s assets […]

(77) The revised orderly resolution plan also includes a comparison with the alternative option of a default by Dexia followed by bankruptcy (immediate liquidation scenario) with no additional State aid and concludes that this scenario is not a viable option given the risks for the Member States concerned raised by the call for guarantees on refinancing granted in the past, its impact on financial stability and the stability of non-securitised debt, derivatives and sovereign bond markets, social costs and the immediate major capital losses.

2.2.1. Liquidity and financing

(78) Dexia drew down EUR 73 billion (peak) of the refinancing guarantee from the Member States concerned in 2012. This drawdown will be reduced to EUR [30-50] billion in 2016 and will gradually be reduced to a level of EUR [20-40] billion in 2020. In a stress scenario, the drawdown of the guarantees could increase by EUR [10-20] billion from 2013 and thus reach EUR [75-85] billion. Figure 4 Breakdown of the drawdown of guarantees […]

(79) Financing needs should fall from EUR [250-300] billion in 2012 to EUR [100-150] billion in 2020. ELA drawdown should be greatly reduced from early 2013 (it was over EUR [10-20] billion at the end of September 2012) and remain at a level close to zero, with the exception of 2016 (EUR [10-20] billion) when it is planned that Dexia will stop using its own guaranteed securities (‘own use’) in order to be refinanced by the Eurosystem. The use of Central Bank financing (Eurosystem operations) will be gradually reduced and own use of collateral guaranteed securities will be limited to EUR [10-20] billion and will fall to zero from 2016. This reduced use of Central Bank operations will be offset by a greater use of securitised financing (repo operations) and market placement of guaranteed securities. Any additional financing needs will be met in the following order of priority: repo market, market placement of new State-guaranteed securities, Central Bank refinancing (Eurosystem operations) and ELA drawdown. Figure 5 Financing mix […]

(80) The resolution plan is based on a macroeconomic scenario and a set of underlying financial assumptions based on the current level of forward rates. A downgrade of up to two credit rating notches is thus envisaged by 2014 for European sovereigns which should help to maintain the credit spreads at their current levels and monetary interest rates which continue to be low throughout the curve. Then from 2014, the stabilisation of market conditions should lead to a gradual rise in interest rates and a convergence of credit spreads towards their historic mean.

2.2.2. Solvency

(81) Risk-weighted assets (RWAs) should reach EUR 59,6 billion at the end of 2012. An increase of EUR [10-20] billion is forecast in 2013. This is chiefly due to the implementation of the Basel III regulation, but also to the forecast downgrading of the credit rating of several sovereigns to which the Group is exposed. Then, from 2014, the RWAs should gradually decline with balance sheet amortisation. At the end of 2020, they should be EUR [20-40] billion, i.e. a decline of [40-50] % in comparison with 2012.

(82) Dexia should record losses of up to EUR 2,8 billion in 2012 and EUR [0-2] billion in 2013. There should be a return to profit from the 2018 financial year (EUR [10-20] million). Operating costs will drop significantly from 2013 (EUR 547 million in comparison with EUR 1,23 billion) largely because of the sale of DenizBank (- EUR [400-500] million) and other entities. From 2013, operating costs will fall progressively by some EUR [180-220] million by 2020. The cost of the risk should be EUR [200-250] million in 2013 and should gradually decline before levelling off at EUR [50-100] million from 2017.

2.2.3. Disposal of the Group’s viable entities

(83) The following sales took place before the revised orderly resolution plan was notified to the Commission: the acquisition of DBB/Belfius by the Belgian State (October 2011), the sale of RBCD (July 2012), DenizBank (September 2012), BIL (October 2012), Dexia Habitat (June 2012), DKB Polska (transfer signed on 7 November 2012).

(84) The revised orderly resolution plan also includes: — the disposal of DMA (January 2013); — the disposal of DAM and Dexia’s holding in Popular Banca Privada and Sofaxis by 31 December 2013; — the disposal (or run-off management) of Dexia Région Bail, Dexia Bail, Dexia LLD and Dexia Flobail by 31 December 2013; — the disposal of Dexia’s (direct or indirect) holding in Dexia Israel within 12 months of a final, non-actionable decision in the various legal actions brought against Dexia Israel and DCL as a shareholder; — the run-off management of Crediop after a period of one year from this Decision.

(85) Dexia has drawn up an information and valuation methodology for all the planned disposals which is proportionate to the size of each planned disposal, which it has notified to the Commission: 1. for disposals of an amount of more than EUR 50 million (category 1): communication of an information note to the Commission and drawing up of a fairness opinion by an independent expert unconnected with the transaction; 2. for disposals of an amount of less than EUR 50 million and (a) an amount of more than EUR 25 million or (b) for which the holding sold is valued at an amount of more than EUR 25 million or (c) for which the purchaser has a shareholding link with Dexia (holding of more than 2 % in Dexia) (category 2): communication of an information note to the Commission and valuation by the consultant bank advising Dexia on the transaction; 3. for other disposals (including all disposals of holdings in financing projects, in particular equity funds) (category 3): in-house valuation by Dexia and notification to the Commission of information on a database shared with the Commission.

2.2.4. Run-off management of all other entities and assets

(86) Run-off management (i.e. with no new production) from the date of entry into force of the revised orderly resolution plan, of all the other entities and assets of the residual Group (subject to the special methods planned for Crediop): Dexia Sabadell, DKD, DKB, DCL America (DCL New York, DRECM, DCL Mexico, Dexia US Securities), DCL Dublin, DLG, Parfipar, DHI (FP, Global Funding), Dexia SA, CLF Banque, DCL Paris, Crediop after a period of one year from this Decision.

(87) Dexia will also make every effort to speed up the disposal of its bond portfolio, when market conditions have improved, and thus satisfy the regulatory ratios, bearing in mind that such a disposal should take place only if it does not a have a substantial negative impact on Dexia’s solvency.

2.2.5. Final refinancing guarantee

(88) The Member States concerned have undertaken to grant a final refinancing guarantee to Dexia as summarised below, from the date of entry into force of the guarantee issue agreement, at the latest by 31 January 2013, after signature of the sale of DMA, the final draft of which was notified to the Commission on 14 December 2012 (‘the guarantee agreement’).

(89) The Member States concerned will grant Dexia SA and DCL a joint financing guarantee, 51,41 % to be provided by Belgium, 45,59 % by France and 3 % by Luxembourg. The guarantee will be limited to EUR 85 billion in principal in the guarantee agreement. The guarantee covers interest and contingencies.

(90) The bonds guaranteed may be issued to 31 December 2021, and have a maximum term of 10 years.

(91) Dexia SA and DCL will not have to provide the Member States concerned with collateral, with the exception of the second-rank pledge granted to the Member States concerned in respect of the assets provided as collateral to the central banks for the ELA, which will be maintained.

(92) DCL will offer DBB/Belfius the opportunity to purchase the bonds that it has underwritten at DCL under the temporary independent guarantee agreement concluded on 16 December 2011 provided that DBB/Belfius underwrites, at the same time, new bonds having equivalent economic features for DCL which will benefit from the final guarantee scheme and in particular the breakdown key discussed above.

(93) The setting-up commission is 0,50 % of EUR 85 billion, less the setting-up commission already paid as part of the temporary guarantee (33), to be distributed solely between Belgium and France, in a proportion of 53 % for Belgium and 47 % for France.

(94) The monthly commission for the financing guarantee has an annual rate of 0,05 %, except for the amount placed with BdF Gestion as long as the ECB accepts the principle of all-in remuneration, for which the commission rate will be identical to what is stated in the 2011 agreement (at present 70 basis points). The commission will be distributed between the Member States concerned, at an annual rate of 0,01 % for Luxembourg and, as regards the remainder, in a proportion of 53 % for Belgium and 47 % for France, from the date of entry into force of the guarantee agreement (after the sale of DMA and by 31 January 2013).

(95) Moreover, the bonds issued from 21 December 2011 and provided with temporary guarantees as temporarily approved by the Commission decisions of 21 December 2011, 31 May 2012, 6 June 2012 and 26 September 2012 will continue to benefit from the guarantees until their final maturity, provided that the conditions under which these guarantees were granted are respected.

2.2.6. Recapitalisation

(96) On the basis in particular of the new assumptions underpinning the revised orderly resolution plan for the Dexia Group which assumes financing costs likely to have a major impact on the prospects of the Dexia Group and DCL in particular, the Board of Directors of Dexia SA, on 7 November 2012, ordered an integral reduction of the value of its holding in DCL. Following this reduction in value, the own company funds of Dexia’s holding became negative.

(97) According to the notification of the revised orderly resolution plan for Dexia, if Dexia’s resolution is to be orderly in nature, the Group’s financial situation has to be stabilised and therefore the negative own funds situation of Dexia SA on 30 September 2012 and DCL on 31 December 2012 has to be addressed. To that end, the French and Belgian States have undertaken fully to underwrite a capital increase for Dexia of EUR 5,5 billion, at the latest by 31 December 2012, through a reserved issue of preferential shares with voting rights.

(98) 53 % of the recapitalisation will be underwritten by Belgium, (i.e. EUR 2,915 billion) and 47 % by France (i.e. EUR 2,585 billion).

(99) Pursuant to Article 598 of the Belgian Companies Code, the subscription price is equal to the mean of the closing rates for Dexia SA shares on the NYSE Euronext Brussels during the 30 calendar days preceding the decision by the Board of Directors of Dexia SA (dated 14 November 2012) to propose that shareholders undertake a capital increase, i.e. EUR 0,19.

(100) This capital increase reserved to the Belgian and French States will be reflected by the award to those States of preferential shares giving them priority, at a rate of 8 % of the nominal value of the share per annum, in respect of any distribution of dividends that Dexia might make. The total dividend shortfall with respect to the rate of 8 % per annum will constitute a liquidation supplement giving the States a priority claim on the distribution of any net assets that may be distributed in the event of liquidation. The preferential rights attributed to the new shares will be limited and/or suspended in the event of the Group’s failure to comply with certain prudential ratio thresholds.

(101) As a result, any future improvement of Dexia’s financial situation will first and foremost benefit the Belgian and French States, having regard to the risk that they are taking. The Member States have indicated that the proposed solution meets the requirement of ‘burden-sharing’ although it does not comply with the principles applicable to bank recapitalisations set out in the Communication from the Commission on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘the 2011 Prolongation Communication’) (34). Under these principles, any recapitalisation should in practice be carried out at a substantial discount with respect to the theoretical price excluding subscription rights. Moreover, the characteristics of the operation, in particular the priority rights attached to the (category B) preference shares, will bring about an economic dilution of existing shareholders as, by application of the rights attached to the preference shares, any capital reductions would be attributed as a priority to ordinary shares so that the proportion of the equity capital represented by ordinary shares would be reduced to an amount close to zero and the capital repayment rights of holders of ordinary shares would be reduced practically to zero.

(102) Dexia will allocate the product of the capital increase to the repayment of its commitments in respect of DCL and the establishment of liquidity reserves for future losses, and to a capital increase in DCL of EUR 2 billion in order to enhance its own funds in accordance with French company accounting and prudential standards, while retaining a cash-flow reserve of some EUR 700 to 800 million.

2.2.7. Elimination of all links between Dexia and DMA

(103) All existing links between Dexia and DMA will be eliminated within a maximum of six months from the closing date of the DMA operation, with the exception of IT systems whose links will be closed down within a period of 24 to 30 months from that date.

2.2.8. No new production

(104) The revised orderly resolution plan makes provision for Dexia’s withdrawal from the markets in which it previously traded either by disposing of entities to third parties, or by placing residual entities in run-off management. Under run-off management there is to be no new production, with the exception of Crediop and DCL as specified below in recitals 105 to 108.

(105) In order to meet the regulatory requirements for Crediop with a view to its run-off management by 31 December 2013, Crediop could offer new financing of up to EUR 200 million to existing customers for a period of one year from the Commission’s final decision. The States could also ask the Commission, at the end of this one-year period, for authorisation for a supplementary package of new financing for a period of one year for reasons of financial stability.

(106) DCL could grant new financing, capped at EUR 600 million, between February and July 2013, or June and November 2014, in order to desensitise the outstanding EUR 1,2 billion of sensitive structured loans still lodged with DCL (loans granted to local authorities and classified outside the Gissler Charter or scored as E3, E4 or E5 in the Gissler Charter or with a Cepcor (35) score of 11 or more). The improvement of the economic value of the debt stock that this should entail is defined by taking account of the lessening of the litigation risk that desensitisation should bring about. This package should make it possible to reduce the risk (of litigation in particular) connected with the loans concerned and also to reduce collateral volatility and the operational risk on complex derivative coverage transactions.

(107) The flows linked to operations to desensitise existing loans lodged with DCL (after the sale of DMA) will also be limited according to the following conditions: — new flows will be solely at a fixed rate; — the maturity of new flows will be limited to 30 years; — the new flows should bring about an improvement of the Gissler or Cepcor score; — during the initial desensitisation period (February-July 2013), the new flows will as a priority concern the most sensitive loans, namely those granted to the [30-50] main customers of DCL which represent [40-60] % of the mark-to-market of the derivatives associated with loans outside the Gissler Charter.

(108) Only the following operations will be authorised for the purposes of desensitisation: […]. This possibility of active restructuring (intrinsically in run-off terms — once the sensitive loans on DCL’s balance sheet have been restructured, there will be full run-off management of DCL’s portfolio) is solely intended to limit, as far as possible and on average, the losses expected on the existing portfolio in a run-off scenario. DCL will not in any case undertake new production in the strict sense (no new production for new customers).

2.2.9. Monitoring of the revised orderly resolution plan

(109) An independent trustee will be responsible for monitoring the implementation of the revised orderly resolution plan and for reporting to the Commission on a half-yearly basis under the same conditions, mutatis mutandis, as those set out in recitals 18 and 19 of Annex I to the conditional authorisation decision.

(110) The independent trustee will in particular submit a half-yearly report to the Commission on the implementation of the commitments of the orderly resolution plan. This report will include a detailed report on progress with the revised orderly resolution plan and in particular on 1) compliance with the amount and desensitisation conditions of DCL’s sensitive loan portfolio; 2) compliance with the cap on new financing granted to Crediop’s existing customers; 3) compliance with the timetable of planned disposals, including the date of the disposal, the accounting value of the assets as at 31 December 2011, the value of the disposal, the capital gains or losses achieved and details of remaining measures to be implemented under the revised orderly resolution plan; and 4) the management and ring-fencing of DAM and Dexia Israel.

2.2.10. Commitments

(111) The revised orderly resolution plan includes commitments, the authentic text of which is attached at Annex 1.

(112) In the introduction to their letter of commitments, the Member States concerned indicate that they will ensure that the revised orderly resolution plan and the commitments are fully implemented. They will apply until Dexia’s assets have been fully written off.

(a) Behavioural commitments

(113) Dexia will not acquire equity capital in other credit institutions, investment firms (36) or insurance companies, without the Commission’s prior authorisation. Such authorisation will be requested only for Dexia’s possible acquisition of a holding in return for an injection of holdings or for activities undertaken as part of an operation to sell or pool assets or activities (by merger or injection) provided that, in such a case, the holding does not give Dexia exclusive or joint control of the entity benefiting from the injection or resulting from the merger. Exceptionally, Dexia may acquire the minority holding of 40 % in Dexia Sabadell (with a view to its run-off management) following the exercise of the Banco Sabadell put option, as that acquisition had not yet taken place on the date of the commitments.

(114) Subject to the commitments that it has already underwritten in respect of Dexia Région Bail, Dexia Flobail, Dexia Bail and Dexia LLD on the date of this Decision, Dexia undertakes to grant no new intragroup financing (i.e. of an amount greater than the intragroup financing existing on the date of this Decision) to the entities to be disposed of in accordance with recital 122 below (‘ring-fencing’). This is without prejudice to the regulatory obligations incumbent upon Dexia as a shareholder of the entities concerned and its obligation to keep Dexia Israel and DAM viable in accordance with recital 129 below. If the implementation of these obligations requires the grant of new financing to the entities concerned, Dexia will inform the Commission in advance thereof.

(115) Dexia will not use its status as a bank benefiting from a guarantee or other aid from the Member States concerned for some of its commitments for the purposes of commercial publicity to third parties other than the ‘Third Party Beneficiaries’ as defined in the guarantee agreement, and will not use the guarantee for pure arbitrage transactions.

(116) As specified in the revised orderly resolution plan: (a) The Member States concerned stress that the features of the preferential shares will make it impossible in practice to pay any dividends on ordinary shares, as the forecasts of profits that may be distributed by Dexia during the period of the plan are lower than the amount of the 8 % preferential dividends to be paid to the Belgian and French States. (b) The Member States concerned stress that the preferential shares are held by the Belgian and French States alone, and that the limits on the distribution of dividends should relate only to ordinary shares and not to preferential shares as that would deprive the Belgian and French States of their right to a dividend on their investment; (c) As regards the participation of preferential shares in losses, as indicated in the revised orderly resolution plan, the preferential shares will lose their preferential rights wholly or partly if Dexia’s regulatory ratios fall below certain thresholds. The preferential shares will in practice be considered base capital (Core Tier 1) until 2018 as they will benefit from temporary regulatory treatment (‘grandfathering’). They will then be converted into ordinary shares (37) depending on the regulatory capital needs of the Group subject to orderly resolution.

(117) Without prejudice to the operations that Dexia is legally bound to carry out, or operations that it is bound to carry out pursuant to contracts concluded prior to the date of this Decision, in respect of Tier 1 or Tier 2 hybrid instruments, Dexia will refrain from: (a) paying coupons on Tier 1 hybrid instruments or Tier 2 instruments held by persons or entities other than Dexia SA and its subsidiaries, the payment of which is discretionary under the contractual terms relating to these instruments; (b) approving or voting in favour of the payment of any form of dividend by any subsidiary controlled directly or indirectly by Dexia SA (including entities in which it has a 100 % holding), especially when such a payment would entail mandatory payment of a coupon on Tier 1 hybrid instruments or Tier 2 instruments held by persons other than Dexia SA and its subsidiaries; (c) exercise a discretionary early repayment option on the Tier 1 hybrid instruments or Tier 2 instruments mentioned in point (a) above; (d) and, subject to a bonus not exceeding 10 % of the market price and a purchase rate (including bonus) not exceeding 90 % of the nominal amount, Dexia may, however, after notifying and obtaining prior authorisation from the Commission, launch public offers for the purchase of issues of Tier 1 and Tier 2 hybrid securities. That does not stand in the way of the distribution of dividends linked to the preferential shares held by the Belgian and French States.

(118) Dexia will continue to implement the remuneration principles decided at G20 level and by the national authorities concerned as regards the remuneration of members of the Boards of Directors and executives of Dexia SA and the main operating entities of the Dexia Group. Dexia will in particular not pay the variable proportion of the remuneration of members of the Board of Directors of Dexia SA and will cap, at 30 % of the fixed proportion of their remuneration, the amount of the variable proportion of the remuneration of other staff of Dexia SA and its banking subsidiaries covered by point 2.5.1.1 of Dexia’s remuneration policy as notified on 15 March 2011 to the CBFA (38).

(119) In accordance with the revised orderly resolution plan, Dexia will not undertake any new production from the date of this Decision, except where the entity in question is subject to a disposal commitment in accordance with recital 122 below. For the purposes of this commitment, ‘new production’ does not include: 1. operations needed for liquidity management (for instance central bank transactions or management of the cover pools of DLG (Dexia Lettre de Gage) and DKD (Dexia Kommunalbank Deutschland) in order to comply with regulatory, prudential or credit rating agency constraints and significantly to improve the cost of financing; 2. the extension of the maturity of existing loans provided that such extension significantly improves the net actualised value of the sums loaned to the same customer, the litigation risk being taken into account when calculating value; 3. the derivative transactions needed to manage the risks linked to the interest/exchange/credit rates of the existing portfolio provided that the effect of such transactions is to reduce the Dexia Group’s global risk exposure, in compliance with the guidelines applicable within Dexia and/or the prudential authorities; 4. all activities required for regulatory or other legal reasons, in particular the extensions of maturity or rescheduling of the timetable imposed on Dexia as a member of a bank syndicate in certain investment projects (the bank syndicate may be asked to accept project structure amendments entailing amendments of maturity and/or timetable) or following decisions by administrative or judicial authorities; and 5. the disbursement of loan commitments confirmed on the date of the decision, i.e. the disbursement operations that Dexia is contractually liable to carry out in order to respect its commitments to borrowers under contracts concluded prior to 30 September 2012.

(120) By way of exception: 1. To prevent the […] issued by Dexia Crediop and thus satisfy its regulatory requirements with a view to its run-off management, Dexia Crediop may draw down new financing of an amount of EUR 200 million for its existing customers for a period of one year from this Decision. On expiry of this one-year period, the Member States concerned may ask the Commission for an additional annual envelope of new financing. Failing authorisation, Dexia Crediop will be placed in run-off management at the end of the year in question. 2. DCL may issue new financing for flows connected with operations to desensitise existing loans (39) lodged with DCL (after the sale of DMA) and deemed sensitive (namely the loans granted to local authorities and classified outside the Gissler Charter, scored as E3, E4 or E5 in the Gissler Charter or having a Cepcor score of 11 or more), provided that the economic value of the debt stock is improved, a substantial reduction of the litigation risk brought about by desensitisation being taken into account when defining this value (40). Only the following operations will be authorised in this connection: […]. Dexia undertakes to limit the total amount of new flows connected with the operations referred to in point 6 above to a maximum amount of EUR 600 million of new financing; however, such operations may be concluded only between February and July 2013 or between June and November 2014.

(121) The flows mentioned in point 2 above will, moreover, be limited in accordance with the conditions set out in recital 106 of this Decision. Dexia will supply the Commission with a periodic review of its plan to amortise and desensitise DCL’s sensitive loans on 15 January 2013 and 15 May 2014.

(b) Disposals and run-off management

(122) Dexia has already undertaken the following disposals: 1. Disposal of DBB. This disposal took place on October 2011; 2. Disposal of the 50 % holding in RBCD. This disposal took place on 27 July 2012; 3. Disposal of DenizBank. This disposal took place on 28 September 2012; 4. Disposal of BIL. This disposal took place on 5 October 2012; 5. Disposal of Dexia Habitat. This disposal took place on 29 June 2012; 6. Disposal of DKB Polska. The disposal agreement was signed on 7 November 2012.

(123) Dexia will undertake to dispose of the entities listed below in accordance with the following timetable: 1. Disposal of DMA by 31 January 2013; 2. Disposal of DAM, Dexia’s holding in Popular Banca Privada and Sofaxis by 31 December 2013; 3. Disposal or run-off management of Dexia Région Bail, Dexia Flobail, Dexia Bail and Dexia LLD by 31 December 2013; 4. Disposal of Dexia’s (direct or indirect) holding in Dexia Israel within 12 months of a final, non-actionable decision in the various legal actions brought against Dexia Israel or DCL as shareholder.

(124) The disposal commitments listed above will be deemed to have been satisfied when Dexia and the acquirer conclude a final and binding agreement (i.e. an agreement which cannot be terminated unilaterally by Dexia without paying a penalty) for the disposal of the whole of Dexia’s holding in the entity or asset concerned, even if all the authorisations or statements of non-objection from the competent surveillance authorities have still to be obtained at the time of signature of the agreement, provided that closing takes place at the latest six months after signature of the disposal agreement.

(125) If one of the disposal commitments listed above is not met, the Member States will, in the month following the deadline for the disposal, propose the appointment of an independent trustee responsible for the disposal of the entity concerned under the conditions set out in recital 132 below.

(126) Prior to each disposal (41) provided for above and still to be implemented, Dexia will keep the independent trustee informed of parties that have expressed an interest in the acquisition of these assets and will provide the expert with all the information necessary and reasonably available to guarantee the potential purchaser’s independence. The Commission will notify the Member States concerned within 15 working days of the names of parties that, in its view, do not satisfy the required conditions of relevance and independence and the reasons for its decision. Dexia will then end any disposal transaction with those parties.

(127) Dexia will make every effort to speed up the disposal of its bond portfolio, when market conditions have improved, and thus to comply with the regulatory ratios; such disposals should take place, however, only if they have no substantial negative impact on Dexia’s solvency. Dexia will provide the Commission with a yearly review of these options.

(128) From the date of notification of this Decision, the entities not listed in recital 122 above (including Dexia Sabadell once the acquisition mentioned in recital 113 ultimately takes place) will be placed in run-off management, in particular with no new production within the meaning of recital 119 above.

(129) In keeping with the company interest of Dexia SA and the Dexia Group, until the actual disposal of DAM and Dexia Israel (and from the clarification mentioned in recital 122, point 4, above as regards Dexia Israel), Dexia: 1. will make every effort to preserve the viability, resaleability by their future purchaser and competitiveness of DAM and Dexia Israel in accordance with sound commercial practice; 2. will make every effort to limit any risk of loss of competitive potential by DAM and Dexia Israel; 3. will refrain from any initiative which could have a substantial negative effect on the value, management or competitiveness of DAM and Dexia Israel or could alter the nature or the field of activity, the industrial or commercial strategy or the investment policy of DAM and Dexia Israel; 4. subject to the ring-fencing commitment mentioned in recital 114 above, will as far as possible provide DAM and Dexia Israel with sufficient resources for their operation in accordance with existing business plans and any subsequent plans; and 5. will take any reasonable measure, including appropriate incentive mechanisms (in accordance with commercial practice) to encourage all the main staff members of DAM and Dexia Israel.

(130) Until its disposal within one year of this Decision or its run-off management, it is agreed that Crediop will be managed separately from the Dexia Group. To ensure that all decisions by Crediop’s management taken between the date of this Decision and the completion of the disposal [within one year of this Decision or its run-off management] are in Crediop’s best interest in terms of its disposal, Dexia will appoint a manager responsible for ensuring that Crediop’s activities are separately managed, and will ensure that this manager can work completely independently to comply with the commitments applicable to Crediop. The manager responsible for ensuring that activities are separately managed could be the managing director of Crediop. He will manage Crediop in its best interests, in consultation with Dexia, under the supervision of the independent trustee as set out in recital 138 below.

(131) It is not necessary to appoint a manager for the separate management of the activities of Dexia Israel and DAM as these two entities are already being separately managed on the date of this Decision for the reasons set out in the resolution plan.

(c) Divestiture trustee

(132) If one of the commitments listed in recital 123, points 1 to 4, has not been met by the deadlines specified above, and if no alternative commitment has been approved by the Commission, the French, Belgian and Luxembourg authorities will submit a list of one to three persons for appointment as trustee(s) responsible for implementing disposals for prior approval by the Commission, at the latest one month after the deadline set for the disposal.

(133) The divestiture trustee must be independent, possess the required competences and must not be subject to any conflict of interest throughout his term of office.

(134) The Commission may approve or reject the proposed trustee(s). If the Commission rejects the divestiture trustee(s), Dexia and the French, Belgian and Luxembourg authorities will propose, within one month of notification of the rejection, from one to three new candidates who must also be approved or rejected by the Commission. If all the proposed candidates are ultimately rejected by the Commission, it will appoint a trustee on the basis of a mandate approved by the Commission.

(135) The French, Belgian and Luxembourg authorities undertake that Dexia will grant the divestiture trustee the necessary and appropriate powers of representation: 1. to dispose of the assets mentioned in point (a) above (including any power needed to ensure the proper execution of the documents required to implement the disposal), and 2. to take any step or make any declaration necessary or appropriate for the disposal, including the appointment of consultants to supervise the disposal process.

(136) The divestiture trustee will include in the disposal and purchase contract(s) the normal and reasonable terms that he deems appropriate to conclude the disposal in the year following his appointment. The divestiture trustee will organise the disposal process in order to ensure a disposal […]. The disposal or liquidation must be effective within a maximum of one year from expiry of the disposal deadline.

(137) The costs of the services of the divestiture trustee will be borne by Dexia.

(d) Implementation of commitments

(138) The Belgian, French and Luxembourg authorities will submit for prior approval by the Commission, at the latest one month after this Decision, a list of one to three persons for appointment as an independent trustee responsible for detailed monitoring of the above commitments (‘the independent trustee’) for a period of five years, which period may be extended at the request of the Commission. The independent trustee must possess the required competences and must not be subject to any conflict of interest during his term of office. The Commission may either approve or reject the independent trustee(s) proposed. If the Commission rejects the independent trustee(s) proposed, the Belgian, French and Luxembourg authorities will propose, within one month of notification of the rejection, from one to three new candidates who must also be approved or rejected by the Commission. If all the candidates are ultimately rejected by the Commission, the Commission will appoint an independent trustee. The costs of the independent trustee’s services will be borne by Dexia and will not exceed the hourly rates normally charged for this type of service.

(139) Throughout the period of the revised orderly resolution plan, the Commission will have permanent unrestricted access to the information needed to implement this Decision approving the revised orderly resolution plan. It may contact Dexia directly to obtain any explanations and details. The Belgian, French and Luxembourg authorities and Dexia will cooperate fully in any verifications that may be requested by the Commission or, where appropriate, by the independent trustee.

(140) The independent trustee will submit a half-yearly report to the Commission on the implementation of the above commitments. This report will include a detailed report on progress with the implementation of the revised orderly resolution plan, in particular: 1) compliance with the amount and desensitisation conditions of DCL’s sensitive loan portfolio referred to in recitals 120 and 121 above; 2) compliance with the caps on the grant of new financing to Dexia Crediop’s existing customers as referred to in recital 120 above; 3) compliance with the planned disposal timetable referred to in recital 122 above, including the date of the disposal, the book value of assets as at 31 December 2011, the value of the disposal, the capital gains or losses made and details of the measures remaining to be implemented under the revised orderly resolution plan; 4) the management and ring-fencing of the entities to be disposed of, in particular DAM and Dexia Israel, as set out in recitals 114 and 129 above.

(141) This report will be submitted at the latest one month after the presentation of the half-yearly accounts and the approval of the annual accounts and in any case by 1 October and 30 April of each year.

(142) On expiry of the independent trustee’s term of office and until Dexia’s assets are fully written off, the Member States will submit an annual report to the Commission describing the stage reached with the orderly resolution procedure.

2.3. DESCRIPTION OF THE DMA DISPOSAL OPERATION AND ITS POST-DISPOSAL ACTIVITIES

2.3.1. Description of the disposal operation

(143) DMA is to be disposed of at the latest by 31 January 2013.

(144) A new credit institution (‘the NEC’) will be created and DMA will be its wholly-owned subsidiary. The NEC will be directly owned by the French State (75 %), the CDC (20 % in preferential shares) and La Banque Postale (5 %). DMA will therefore no longer be controlled by the Dexia Group but by the French State, the CDC and La Banque Postale.

(145) A joint venture (‘JV’) will also be created and will have the status of banking transaction intermediary between the CDC (35 %) and La Banque Postale (65 %), marketing new loans solely to French local authorities and public health establishments and using DMA as a refinancing vehicle. DMA will also provide the refinancing needed for existing outstanding loans. Figure 6 Structure of the future development bank incorporating DMA

(146) La Banque Postale will gradually acquire more of the NEC’s capital. The price to be paid by La Banque Postale will be a market price, determined by a fairness opinion, and may be verified by the Commission. La Banque Postale will have a progressive call option on a quota of the shares held by the French State such that its holding in the NEC, after the call has been exercised in full, is raised in line with the increase in the share of outstanding loans for which new production accounts in all DMA’s asset components (‘cover pool’). The call may be exercised only from the time at which the share of new production ‘originated’ by La Banque Postale or the JV exceeds […] % of DMA’s cover pool. Each year, La Banque Postale may exercise the call for a minimum quota of […] % of the NEC’s capital, although 1) La Banque Postale’s holding in DMA may not be greater than the share of new production originated by La Banque Postale or the JV in DMA’s cover pool and 2) La Banque Postale may not be the NEC’s main shareholder.

(147) The legal procedures for the disposal of DMA will follow the following overall scheme: DCL will supply the NEC with DMA’s shares, and the tools, personnel and resources needed to manage DMA, and will then sell 100 % of the NEC’s capital to the State, the CDC and La Banque Postale. The sale price will be EUR 1.

(148) In respect of this price, the Commission notes the following points, raised by an audit consultancy and the Member States concerned.

(149) A fairness opinion of 10 October 2012 from a financial analysis consultancy commissioned by the French authorities and the CDC states that ‘a price of EUR 380 million for 100 % of the NEC (itself holding 100 % of Dexia Municipal Agency ‘DMA’) is an acceptable price for an informed investor’. It is specified that this price assessment takes account of the fact that ‘Purchasers will benefit from general and specific asset and liability guarantees in particular including a guarantee of the validity of loans granted and their contracts’ and reflects: ‘— the provision of resources and expertise needed for the activity; — the disposal of an existing debt stock; — the marketing of new loans by LBP and the [JV]; — the neutralisation of sensitive loans. This valuation is valid only if combined with the general and specific guarantees and the overall sensitive loan disposal mechanism. […]’ (42).

(150) The fairness opinion also states that ‘the value of NEC/DMA, as the progressive recovery of value adjustments has been taken into account, is indicatively EUR […] in a value run-off scenario’.

(151) In their memorandum on the DMA sale operation (‘the memorandum on the DMA sale operation’), the Member States concerned also note that, initially, ‘it was agreed that the purchase price of DMA and the tools, personnel and resources transferred by DCL would be EUR 380 million’ [footnote: and that ‘the parties had planned for [Dexia] and DCL to grant a number of purchaser guarantees in connection with the disposal of DMA: a performance and litigation guarantee on […] of sensitive loans, a ‘stop-loss’ guarantee above an annual threshold of 10 basis points on mean outstanding loans, and other general and specific guarantees’ (43).

(152) They also indicated that they subsequently agreed to abandon the ‘stop-loss’ guarantee, and, then, ‘the synthetic transfer of sensitive loans to DCL’s balance sheet. France’s guarantee covering DCL’s commitments in this respect has also been abandoned’ (44).

(153) According to the Member States concerned, it was ‘in order to take account of these two significant changes to the DMA disposal procedure and preserve its market character [that] the sale price was revised downwards and set at EUR 1. This new price (which no longer depends on DMA’s net situation) also takes account of the abandonment of the price adjustment clause’ (45).

(154) After noting that the fairness opinion states that the price of DMA and the tools, personnel and resources needed for DMA’s management would be EUR 380 million in the initial disposal procedure (which included the guarantees and the price adjustment clause), the Member States concerned specified that ‘as the guarantees and the price adjustment clause included in the procedure have been abandoned and in view of DMA’s balance sheet situation in the first three quarters of 2012, the adjusted price of EUR 1 fully preserves its market character’ (46).

(155) The French authorities consider that there is a market shortfall as regards the financing of French public health establishments and local authorities. The French authorities, and the CDC and La Banque Postale, were therefore planning to purchase DMA (by purchasing the NEC which was DMA’s 100 % shareholder) in order to convert it into a ‘development bank’. The scope of action of this development bank would be limited to correcting the market shortfall for the financing of French public health establishments and local authorities, as that shortfall could not be corrected by the available market supply. The French authorities adduced the following arguments in support of this market shortfall and the need to set up a development bank.

Financing of public health establishments in France

(156) According to the French authorities, hospital investment totalled EUR 6,5 billion in 2010 (a 4,5 % drop in comparison with 2009) after continuing to rise since the beginning of the 2000s. Most of this investment was financed by self-financing and subsidies. The level of coverage of investment by medium- to long-term debt was 36 % in 2010.

(157) The annual medium- to long-term financing need of public health establishments in France thus varies between EUR 2 and 4 billion in different years. It covers the financing of investment and the repayment of loans reaching maturity.

(158) Moreover, this financing need covers heavy, in particular property-related, investment projects, in a context in which the obsolescence rate (which relates accumulated depreciation to the gross value of property and which reached a historically high level in 2002) required major investment to preserve the building stock: the obsolescence rate increased from 50 % to 55 % between 1997 and 2002. Compared with the 2002 breakdown, the breakdown of direct investment by type in 2010 thus showed a shift towards property and away from ‘equipment’.

(159) In future years, investment needs will be at two main levels. Essential safety issues will have to be tackled as a priority (compliance with earthquake-related standards, risks of flooding, asbestos removal, priority fire risks); investment projects in the quality of healthcare supply will also be needed. These will also chiefly involve property operations (construction, reconstruction, refitting, etc.) which generally represent heavy investment and for which at least some borrowing is unavoidable.

(160) In parallel, public health establishments have a major short-term financing need of some EUR 3 billion per annum (with a mean drawdown of 50 %), because of their need for substantial working capital. This need is chiefly explained by the time lag between payments by sickness insurance to public health establishments and their tight expenditure timetable.

(161) On the supply side, French banks are not in a position to take up Dexia’s market share. The total outstanding debt of health establishments was EUR 22,8 billion at 31 December 2012. Historically, and as in the case of local authorities, this debt has been largely supported by the banking sector. Unbrokered financing is in practice marginal (only 5,7 % of outstanding debt is in the form of bond issues), largely because there are so many small establishments: France had 1 034 public health establishments on 31 December 2010. The university hospital centres, which are the largest establishments, account for 99,1 % of all bond issues.

(162) Dexia held by far the largest market share: in recent years the bank covered some [40-45] % of medium- to long-term financing needs and provided around one third of cash flow lines. As stock, Dexia continued to hold [30-35] % of total outstanding debt at the end of 2010 (see graph below).

(163) According to the French authorities, the other French banks would also not be in a position to take up the market shares left by Dexia for various reasons: (a) knowledge of this market continues to be limited, largely because of the small volumes in play, whereas Dexia had a very good knowledge of the market; (b) the forthcoming application of the new Basel III prudential ratios, especially the liquidity ratios and the leverage ratio, is deterring banks from pursuing activities involving the grant of long-term loans, especially when these loans are not being offset by the collection of deposits through which banks can stabilise their financing sources. Like local authorities, it is mandatory for public health establishments to deposit their available funds in a treasury account. There is also an issue specific to public health establishments since they have a structural need not just for medium- to long-term bank loans, but also for cash flow lines. The new Basel III regulations penalise cash flow lines as a counterpart for which banks will have to create more own funds as well as a substantial liquidity buffer. In this context, French banks have undertaken to maintain their outstanding loans to the local public sector (including both local authorities and public health establishments) in 2012 (i.e. loan production of the order of EUR 9 to 10 billion). In France’s view, this rules out any take up of the market shares left by Dexia. The general balance-sheet size objective of French banks is thus affecting not just the financing of local authorities, but also the financing of public health establishments.

(164) For these various short-term and long-term reasons, the French authorities fear that it is unlikely that the margin improvements and the small volumes in play will be enough to bring about a natural rise in the private supply that is able to make up for Dexia and satisfy the demand from French public health establishments.

Financing of local authorities

(165) The local public sector in France is made up primarily of local authorities, i.e. municipalities and their groupings, regions and départements. The economic scale of these entities corresponds to an annual expenditure flow of the order of EUR 220 billion (total management and investment expenses). Investment expenses were EUR 50,4 billion in 2010 and EUR 52 billion in 2011, i.e. three quarters of public investment in France. Local authorities are therefore the main players in maintaining and developing infrastructure in France.

(166) To finance these expenses, local authorities have various resources: (a) savings from the current expenditure surplus left after paying management expenses and debt interest: self-financing, although this finance has to be channelled as a priority into the repayment of debt reaching maturity in the budget year; (b) investment funds chiefly from other public sector entities (State, European funds); (c) borrowing (EUR 18,6 billion in 2010 and EUR 16,7 billion in 2011).

(167) As the amount of new borrowing to finance investment has been higher than the repayment of loans reaching maturity, local authorities have thus amassed, over time, an outstanding debt totalling EUR 152 billion in 2011. Table 3 Outstanding debt of French local authorities as at 1 January 2011 (in EUR billions) Outstanding debt as at 1 January Total 103,4 102,3 102,9 105,0 108,8 114,2 120,6 128,6 138,1 145,7 151,9 Municipalities + separately taxed groupings *** 58,9 59,4 59,4 59,9 60,9 63,2 66,1 69,6 73,1 75,2 76,5 Départements 17,1 16,4 16,5 17,0 17,8 18,9 20,0 21,4 24,4 27,9 29,7 Regions 7,8 7,5 7,6 8,2 9,5 10,2 11,1 12,7 14,2 15,7 16,8

(168) The French authorities consider that forecasts of new borrowing volumes in future years have to take account of a number of parameters such as: (i) trends in the revenue and management expenditure of local authorities likely to determine self-financing; (ii) the investment needs of local authorities which are to some extent linked to the electoral cycle. The time needed to examine and implement projects and the desire to finalise them before the end of the French municipal elections tends to be reflected by a drop in investment at the beginning of terms of office and an increase at the end of these terms.

(169) Moreover, a simulation was conducted on the basis of the data available at the end of 2011 to try to anticipate the public-sector borrowing need according to two different scenarios of the capacity of local authorities to release self-financing margins in their operational section (47). These problems may have many causes: low fiscal revenue, freezes by a central State itself facing grant cuts or increases in certain expenditure lines such as social welfare. Table 4 Capacity of local authorities to release self-financing margins in their operational section Scenarios: Scenario 1-a Scenario 1-b Investment levels No constraint — linked to electoral cycle Management revenue + 2,6 % due to: — taxation bases: + 3 % — stable property sale taxes — freeze on State contributions Scenario 1-a with the following changes: — property sale taxes 5 % lower — drop of 1 % per annum in State contributions Management expenses + 3 % due to — increased financial costs — increased welfare benefits — personnel expenditure growing by 2,5 %.

(170) The new borrowing need is EUR 19,5 billion on average in scenario 1-a and EUR 21,5 billion in scenario 1-b. Outstanding debt would reach EUR 175 billion and EUR 185 billion respectively by the end of 2016.

(171) There may be a further scenario: a cap on the debt capacity of authorities due: (i) either to a resolve on the part of the public authorities to limit debt, (ii) or an inadequate supply of financing. Whatever the cause, investment would be substantially slowed down if borrowing capacity were to be limited.

(172) In the view of the French State, therefore, keeping outstanding debt constant in value would limit new borrowing over the period to amounts of between EUR 12 and 14 billion. Investment levels would then be limited. In this case, investment would fall by EUR 51,9 billion in 2011 to EUR 43,2 billion on average between 2012 and 2016, i.e. a level comparable to that of 2004/05 and a reduction of the investment levels in the previous two scenarios by an average of 16 %.

(173) Such a reduction would have an adverse impact on the development and maintenance of public service infrastructure (transport, education, environment, energy) and on the level of activity of the construction and public works sector (as a reminder, local investment accounts for close on 75 % of construction and public works activity).

(174) In summary, the borrowing need of local authorities is forecast to be constant or even to grow in future years. Only external constraints could limit this need and would entail a substantial reduction of public investment as local authorities have few alternative sources of financing.

(175) Moreover, other public sector entities may also have borrowing needs and be financed by mortgage lending companies: (i) public hospital centres whose outstanding debt is estimated at EUR 24 billion and whose annual borrowing need is estimated at EUR 3 billion; (ii) social housing bodies whose outstanding debt is estimated at EUR 100 billion (a large proportion of which is guaranteed by local authorities) and whose annual borrowing need is estimated at approximately EUR 15 billion; (iii) other public establishments run by the State and local authorities.

(176) The total market, at the local public sector level in the broad sense, can therefore be estimated at EUR 40 billion per annum. The new development bank will, however, finance only local authorities and health establishments (and not the French public sector as a whole).

On the supply side: volume and price competition

(177) Against a background of sustained demand, the supply of financing for the public sector has declined sharply because of: (a) the withdrawal of the market leader, Dexia, which met 40 % of the sector’s needs up to 2008; (b) the lack of appetite on the part of French banks which are keen to spread their financing capacity among all their customers and in particular customers with banking access; (c) the withdrawal of foreign banks which, because of the crisis, have less financing capacity.

(178) The authorities concerned point out that these various factors led the Caisse des Dépôts et Consignations to renew in 2012, as in 2011, an emergency package of EUR 5 billion offset against savings funds and offered at a price of EURIBOR + 3,20 %.

(179) The following table estimates the amount of the supply from the various banks for the local public sector in the broad sense, i.e. local authorities, hospital centres and social housing bodies. The need which is not covered is in the order of EUR 7 to 8 billion. If social housing bodies are not covered by the new development bank, the bank’s objective will be to rectify the financing need of local authorities and public health establishments which is not covered, i.e. an amount of as much as EUR 8 billion. Table 5 Estimation of the amount of the supply available from the various banks for the local public sector in the broad sense EUR billion 2008 2009 2010 2011 2012 2013 Crédit Agricole (including BFT, CA CIB) […] […] […] […] […] […] BPCE […] […] […] […] […] […] Dexia Crédit Local […] […] […] […] […] […] Société Générale […] […] […] […] […] […] Other (foreign banks, EIB, CM, etc.) […] […] […] […] […] […] CDC (direct PRCT and savings fund packages) […] […] […] […] […] […] Not covered 7 8,5 Total 40,3 40,4 39 38 40 40 (estimations drawn up by Dexia) (*) Yc distribution of the share of the PRCT awarded to Dexia, BPCE, CM and Depfa, i.e. EUR 1,5 billion (**) Yc distribution of the share of the 2012 PRCT awarded to Dexia, BPCE, CASA, CM, SG and Depfa, i.e. EUR 1 billion

(180) This restriction of the supply has gone together with a structural increase in prices since the 2008 financial crisis. Whereas prices were around 100 basis points above EURIBOR in the first half of 2011, they rose to above 200 basis points in the second half of 2011.

(181) The demand for the CDC package is more than three times higher than its volume: the EURIBOR + 320 basis points price is thus lower than the price that would balance supply and demand if the market were operating conventionally.

(182) In a more structural way, two factors are making this market unattractive to general banks: (i) the lack of certain revenue additional to loans, especially because funds must be deposited with the Treasury; and (ii) the very long maturity of the financing requested (15 years or more) which is in line with the technical depreciation of investment but makes it necessary for financiers to raise liquidity for similar periods.

(183) The French authorities also point out that it is common in the other countries of Europe for public establishments to be part of this market and that they meet over half the needs of local authorities. By way of example, the Cassa Depositi e Prestiti (CDP) in Italy, the regional public banks in Germany, the PWLB (Public Works Loan Board) in the United Kingdom and the public financing companies in the Nordic countries (Denmark, Norway, Sweden).

(184) On the basis of the factors discussed above, the French authorities conclude that the establishment of the development bank would supplement the supply from private banks, which is inadequate in the long term. The effect of this new entry into the market would be to bring supply into line with demand, without driving existing players out of the market.

The DMA, NEC and JV consolidated business plan

(185) The DMA, NEC and JV consolidated business plan notified to the Commission contains the following main elements: (a) New loan production should be EUR [2-5] billion in 2013 and then EUR [3-6] billion annually from 2014. (b) Covered bonds will be issued for refinancing purposes. Overcollateralisation will be financed at market price by the supply of liquidity from the CDC to the NEC. (c) The net banking product should be EUR [75-125] million in 2013 and will increase progressively to EUR [175-225] million in 2017. Operating costs should be approximately EUR [75-125] million and the risk cost will be limited to EUR [0-5] million. The net result should be negative until 2014. The cumulative net result should be EUR [100-150] million over the next five years. (d) DMA’s balance sheet should decrease by some [5-15] % by 2017. On that date,