How to Profit From $5.4 Billion Belgian Rescue of Dexia

Dexia SA agreed to sell its Belgian banking retail operations to the Belgian government for 4 billion euros ($5.4 billion) in order to prevent the Belgian-French financial institution from going bankrupt. Dexia had recently lost access to short term funding because of concerns over its debt holdings of troubled eurozone countries like Greece, Italy, Spain, Portugal, and Ireland.Dexia also received 90 billion euros ($121 billion) in financing guarantees from the governments of Belgium, France and Luxembourg. Belgium's 60.5 percent guarantee is the largest portion of the guarantees, while France and Luxembourg will provide guarantees of 36.5 percent and 3 percent, respectively.There has been much talk lately over European plans to recapitalize the banking sector. While there is widespread agreement over the need to recapitalize the eurozone's banks, eurozone leaders haven't reached agreement on how to proceed. Some leaders, like French President Nicolas Sarkozy, are concerned that if their federal governments provide the capital necessary to finance the bank recapitalizations then the governments' credit ratings could suffer, which would drive up their borrowing costs. These concerns are sure to grow after Moody's Investors Service placed Belgium's credit rating on review last week for possible downgrade, in large part because of the likelihood that the Belgian government would have to rescue Dexia.The move by Belgium to buy the troubled lender's Belgian retail operations could be a sign that other eurozone governments will soon be forced to rescue their biggest banks from possible collapse. The French banking sector was under particular scrutiny recently, with rumors swirling about the liquidity of France's biggest banks. Investors will probably have even less faith in bank stress tests because Dexia was declared financially sound just three months ago during the last round of stress tests of the European banking sector. If there are any more European banks that find themselves in the same situation as Dexia, it could spell trouble for the future of the euro.The Dexia rescue shifts risk away from banks and onto the taxpayers without addressing the underlying problems that led to the Belgian government's intervention. With eurozone taxpayers being forced to take on more of the risk burden, the euro could come under more pressure. By taking on the banks' risk, governments like France, Belgium and Luxembourg could see their credit ratings downgraded and their borrowing costs rise. If this scenario plays out, the ProShares UltraShort Euro (NYSE: EUO) and the Market Vectors Double Short Euro (NYSE: DRR) ETFs could climb as the euro falls.On the other hand, investors who see the news of the Dexia rescue as a sign that eurozone leaders are taking proactive steps to prevent the European financial system from collapsing might want to take a look at the iShares MSCI Europe Financials (Nasdaq: EUFN) ETF. European financial stocks have already fallen considerably this year, so intervention on the part of European governments might be enough to stop share prices from falling much further and once the outlook in Europe improves, financial stocks could see the biggest gains.Investors could also buy individual European banking stocks that trade on American stock exchanges as ADRs, like Banco Santander (NYSE: STD), Credit Suisse Group (NYSE: CS) and Deutsche Bank (NYSE: DB). While there's more risk in buying individual banking stocks, there's also more potential upside than buying a basket of European financial stocks provides.