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European bank’s woes hit home in U.S.

Amy Scott Oct 4, 2011

European bank’s woes hit home in U.S.

Amy Scott Oct 4, 2011

Kai Ryssdal: I’ve going to level with you right now. We spend an inordinate amount of time around here trying to figure out how best to explain what’s happening in Europe. Both the nuts and bolts, too much debt, not enough capital and why it matters — what happens here if it all goes bad over there.

Today, we had a really good — as in really bad — example fall right in our laps. The French and Belgian governments are promising they’ll bail out a bank called Dexia. Dexia’s got a lot of Greek debt on its books. You’ve probably never heard of it. But a ton of local governments here in the U.S. have.

Marketplace’s Amy Scott gets us going today.

Amy Scott: What does the Greek debt crisis have to do an ice skating rink in a Seattle suburb? To help pay for the rink, the city of Everett, Wash., issued bonds. The bonds have an interest rate that can change every week and investors can sell them back on short notice.

Jeff White advises municipal bond issuers with Columbia Capital Management. He says that’s where the French-Belgian bank Dexia stepped in.

Jeff White: Because most entities that issue these bonds don’t just have a bunch of cash laying around to make good on the promise to buy those bonds back from the investors every week, they actually engage a bank to do that for them.

Dexia’s now on thin ice because of all the Greek debt it owns. And muni investors are demanding higher interest rates on bonds backed by the bank.

Peter Shapiro is with Swap Financial Group. He says that’s raising borrowing costs.

Peter Shapiro: The consequence for American states and cities and airports and highway systems and school systems is that if they have Dexia on their bonds, then the rate will tend to float much higher than it otherwise would.

Dexia backs an estimated $10 billion in variable rate municipal bonds in the U.S., according to Municipal Market Advisors. Until recently, these included bonds issued by the Texas Veterans Land Board, which provides home loans to veterans in the state.

The board’s Rusty Martin says its deal with Dexia was set to expire in November. He didn’t wait.

Rusty Martin: Interest rates on bonds backed by Dexia started getting higher than other providers, so we went ahead and started pulling the trigger on replacing them.

Today, the French and Belgian governments tried to reassure markets. But adviser Jeff White says if governments have to do that, more bond investors might think it’s time to head for the exits.

I’m Amy Scott for Marketplace.

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