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Dexia trouble could spread to American cities

An illustration shows flags at the Dexia bank headquarters in Brussels, on October 4, 2011.

Adriene Hill: The European bank Dexia is in some pretty significant trouble today, on concerns over just how much Greek debt it has on its books. French and Belgian finance ministers said today their countries will guarantee financing for the bank, but Dexia's problems could spread.

Marketplace's Gregory Warner joins us live with more. Good morning.

Gregory Warner: Good morning.

Hill: Tell me about Dexia.

Warner: So Dexia is a Belgian bank, and they're running out of cash. They own a lot of Greek debt, a lot of Italian and Spanish debt -- those are obviously not good bets right now. Dexia also extends credit lines to American cities. So if a city needs to raise cash, they issue a bond -- Dexia guarantees those bonds.

Hill: What's the fallout for those American cities doing business with Dexia?

Warner: Well, I called Paul Simon at Tactical Allocation Group. He says many American cities have found a new bank to guarantee their bonds, but cities that are still stuck with Dexia -- and there are a number of them -- could suddenly have a lot less cash. American investors would get hurt as municipal bonds lose value. And even the possibility of a restructuring for Dexia prompts a deeper worry.

Paul Simon: Confidence, a lack thereof -- and we believe Dexia's just the warm-up act, because there have been distress signals in the short-term funding markets in Europe for a while now.

If that rises to the level of what he calls "a crisis" of confidence, we could see other banks following Dexia into that trouble zone.

Hill: Marketplace's Gregory Warner, thanks so much.

Warner: Thanks.

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