The European Commission raised doubts over a proposal for Dexia Municipal Agency to be sold to the French state, Caisse des Dépôts et Consignations and La Banque Postale when announcing yesterday (Thursday) that it is extending its investigation into the restructuring.

Under the proposed restructuring plan, the transfer of Dexia MA ownership will be accompanied by government guarantees to cover refinancing measures to be issued until the end of 2021 and the EC noted that the remuneration would be close to zero. It said that it doubted this is compatible with state aid rules, and said it will assess whether the plan is credible in bringing about an orderly resolution of the bank and whether it limits competition distortion.

“The Commission considers at this stage that the aid received by Dexia should not be used to allow the perpetuation of the failed business model of Dexia at the level of DMA,” it said. “In particular, the Commission doubts that the continuation of the activities of DMA is less distortive of competition and less costly for the Member States than any other alternative.”

However, the EC temporarily approved an extension until 30 September of guarantees from Belgium, France and Luxembourg to cover new refinancing of Dexia SA and Dexia Crédit Local.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that this latter move was welcome, but that the EC’s concerns and extension of its investigation could mean that negative spread momentum in Dexia MA obligations foncières witnessed in recent weeks picks up speed.

“The main driver of the initial tightening had been based on the new ownership structure and if that is questioned by the EC it might create nervousness among investors,” he said.

Eichert nevertheless said that he expects an outcome whereby Dexia MA will be sold to CDC and La Banque Postale, and also kept up and running rather than wound down.