The governments of France and Belgium have ridden to the rescue of banking giant Dexia in the first bank bail-out caused by the eurozone debt crisis.
Dexia, a lender to thousands of French local authorities, will see its French municipal finance arm broken off and put under the ownership of French government banks.
The rescue plan also looks likely to involve a broader break-up, with the sale of healthier operations, such as its Belgian and Turkish banking businesses, as well as the creation of a state-supported bank containing toxic assets.
"We have to put all the dangerous parts outside of the bank. It is here where the state guarantee will come into play, it's what's called a 'bad bank'," Belgian Finance Minister Didier Reynders said after a joint Franco-Belgian government statement pledging support.
But the central banks of France and Belgian issued a joint statement urging depositors not to withdraw their funds to head off a run on the bank.
“The NBB insists that savings clients of Dexia Bank Belgium are perfectly secure and there is no reason for customers to make withdrawals,” they said.
“Both central banks have been closely monitoring the financial position of Dexia for some time. They, in concert with the Belgian and French authorities, support the structural measures developed by the group.”
“The NBB says the public can be reassured about the safety of their savings at banks operating in Belgium," they added.
The announcements come just days after Dexia denied it was considering a break-up.
Last Wednesday the bank issued a statement saying its chairman, Jean-Luc Dehaene, “stressed that contrary to certain rumours the board of directors and Dexia shareholders, both public and private, exclude any scenario involving a demerger of the Group.”
But Dexia has been laid low in recent weeks by its heavy exposure to Greek government and bank debt, and problems accessing the wholesale funding market.
The bank’s shares have slumped as much as 38 per cent to an all-time low as confidence in the group has collapsed.
"Basically, what we're getting towards here is backdoor nationalisation," said one London-based analyst speaking on condition of anonymity.
"Everything that's happening now is just a case of how you split up the pie but really the pie is all going towards the state, effectively."