Days after already partially nationalizing the group, the three governments offered the guarantee in order to avert a cash crisis at Dexia as lending between banks has all but dried up in recent days.
"We have reached an agreement that stabilizes Dexia, an agreement that is all the more important in the topsy-turvy world in which we are living," chairman Jean-Luc Dehaene said on a conference call.
Dexia shares, which have lost 65 percent of their value since the start of the year, surged following the announcement and were showing a gain of 20 percent at 6.03 euros shortly ahead of midday in Brussels.
"This agreement that we have just reached is an expression of the three government’s very firm support for Dexia," Luxembourg Treasury Minister Luc Frieden said.
The latest move marks the second time in 10 days that the three governments have ridden to Dexias rescue. They hastily arranged a capital injection of 6.4 billion euros of taxpayer’s money into the ailing bank on September 30.
"After the recapitalization, the guarantee is an important step for Dexia," Luxembourgs Frieden said. "It’s in the interest of the bank and
its clients, who can rest assured about their deposits."
Under the measure agreed during late night negotiations, the Belgian state will guarantee 60.5 percent of Dexia’s borrowing, France 36.5 percent and Luxembourg 3.0 percent.
The guarantee, which will last until October 31, 2009, will cover both Dexia’s borrowing on the interbank market and new issues of short-term bonds to institutional investors.
Like a growing number of banks, Dexia has run into trouble as banks have grown wary of lending to each other as the worst financial crisis in generations whips across Europe.
British Prime Minister Gordon Brown wrote to EU leaders Wednesday to urge them to follow Britain in guaranteeing loans between banks in order to restore confidence in the interbank lending market.
Announcing the latest measures to support Dexia, Belgian Prime Minister Yves Leterme said that similar guarantees could be extended to other big Belgian banks.
Dexia was founded in 1996 in a merger of France’s Credit Local and Belgium’s Credit Communal. While it specialises in local government finance, it also has 5.5 million individual clients in Belgium, Luxembourg, Slovakia and Turkey.
Dexia, whose corporate motto is "short term has no future," has struggled to ease concerns about its U.S. bond insurer FSA and its exposure to the slumping U.S. mortgage market.
Chief executive Pierre Mariani, who was parachuted in after his predecessor was ejected following the first state rescue, insisted that FSA’s portfolio had little exposure to toxic mortgage-backed securities.
Under the agreement, Dexia will not follow the fate of Fortis and be broken up, contrary to what some press reports said late Wednesday.