Three European governments yesterday agreed to take further measures to support Franco-Beligan bank Dexia SA, a top provider of credit enhancement in the U.S. municipal market and parent of bond insurer Financial Security Assurance Inc.

The governments of Belgium, France, and Luxembourg said they will guarantee new borrowing to the bank, one week after they injected $9.2 billion in capital into the company along with institutional investors.

"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," Dexia's new chairman, Jean-Luc Dehaene, said in a conference call, according to reports.

The government will guarantee all interbank and institutional lending to Dexia, as well as any new debt financing by institutional investors, with maturities of up to three years. Dexia will pay fees in return for the guarantee.

The agreement will expire Oct. 31, 2009, with an option to renew it for one year.

The company will remain intact for now after reports it would be split. Dexia chief executive Pierre Mariani said on the conference call it would not be easy to isolate FSA from the rest of the company, as some of have suggested, according to reports.

Losses in FSA's financial products unit due to U.S. housing market exposures have hit Dexia's bottom line. FSA in August announced it will no longer write structured finance products.

Standard & Poor's Wednesday placed FSA's AAA financial strength rating on negative watch in part due to uncertainty about the level of Dexia's support. FSA said it believes the rating action was related to factors unrelated to its "fundamental credit strength" and that it has "sufficient resources to meet all claim payments in Standard & Poor's current triple-A stress environment."

Standard & Poor's yesterday said the ratings of three series of prepaid gas revenue bonds are unaffected by the CreditWatch status of FSA. FSA provides surety policies for liquidity if a municipality fails to pay for gas delivered on bonds from Main St. Natural Gas Inc., Series 2006A and B, and Roseville Natural Gas Financing Authority, Series 2007A.

Both Dexia and FSA have acted as top credit enhancers in the municipal market this year. Dexia this year ranks as the top standby purchase agreement agent - wrapping 72 issues with a par value of $7.5 billion - and the third largest letter of credit provider - wrapping 45 issues with a par value of $3.95 billion - according to Thomson Reuters data. FSA ranks as the top bond insurer, working on 1,321 issues with a par value of $37.7 billion.

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