FRANCE and Belgium agreed to pump €5.5bn into Dexia, the stricken lender the two states were forced to bail out a year ago, after it made another large loss and extensive writedowns.
The prospect of injecting more money into Dexia, which had already absorbed €6.4bn in funds in 2008, threatens to undermine both countries' efforts to rein in their deficits at a time of intense scrutiny on euro zone budgets.
Belgium will inject €2.92bn, or 53pc of the total, with France providing the remaining €2.59bn, the Belgian and French ministries said in statements.
The two states would receive in return preference shares with voting rights, so any financial gains Dexia makes would then flow back to them.
The move was announced shortly before Dexia released third-quarter earnings showing it had made a net loss of €1.23bn, bringing the loss for the first nine months to €2.39bn. It lost €11.6bn in 2011.
Most of the negatives have been in the form of impairments and writedowns related to the sale of assets.
The group, rescued for a second time in three years last October, also had to pay fees of €725m to the states for the guarantees, which cover Dexia's borrowings, in the first nine months of 2012.
Its revenue from new loans has also tumbled.
Dexia said that as from the end of September it had a negative net asset position, mostly resulting from a writedown on the value of its holding in French arm Dexia Credit Locale, prompting its need for fresh funds to stay in business.
As part of the deal, the two governments also agreed to readjust the division of guarantees to cover Dexia's borrowings.
In future, Belgium would take on 51.41pc of these guarantees and France 45.59pc.
Previously the share had been Belgium at 60.5pc and France at 36.5pc. Luxembourg would continue to provide 3pc.
The guarantees would be limited to a maximum of €85bn, compared with the €90bn agreed a year ago.
The capital injection will require approval from Dexia shareholders, most of them French or Belgium public entities, as well as France and Belgium themselves. Shareholders, set to meet in December, would also be asked whether Dexia's activities should continue.
The whole operation will also need clearance from the European Commission, which has so far given the green light to guarantees for a limited period.
Dexia so far has drawn €53.8bn of guarantees, in addition to €20bn from the same three states under a plan agreed at the height of the financial crisis in 2008.
Dexia submitted its restructuring plan to the Commission in March. The plan envisages Dexia essentially pared down to a holding of bonds and outstanding loans, propped up by state guarantees.
Belgium has nationalised Dexia's retail banking operations there and the lender has sold other assets including Luxembourg-based private bank Dexia BIL, Turkey's DenizBank and its 50pc state in funds services joint venture with Royal Bank of Canada.
It still has to divest its asset management business and its French public sector lending arm.