The board of rescued Dexia bank warned on Wednesday that any rapid winding up of the French-Belgian bank could pose a systemic danger to European finance and activate huge government guarantees.
The warning came in a notice to shareholders who are due to vote on December 21 to endorse a new plan for a change in the way the French and Belgian governments share state guarantees for the bank.
The scheme remains subject to approval by European Union competition authorities.
Under the deal, the French and Belgian governments agree to provide a new round of support for the bank with extra capital of 5.5 billion euros ($7.0 billion).
With the bank effectively finished as a going concern, but kept artificially alive with state guarantees, shareholders can expect no dividends or rise of the share value.
The board warned that if the bank were wound up, there would be "very serious systemic consequences."
It said that if Dexia assets were offloaded quickly they would lead to book losses higher than the bank's capitalisation.
A subsidiary focused on financing local authorities, and which was liable for a large part of the group's commitments, would then be liable immediately to pay its debts.
The board warned that these liabilities in September amounted to 386.5 billion euros to which another 605 billion euros could be added if derivative instruments were also taken into account.
This would amount to a default of such magnitude that "it would threaten the whole of the European financial system", create panic on the markets "and effect their liquidity" as well as spread "contagion" in the euro zone, the board said.
The remarks referred to holdings by the bank, at the end of September, of sovereign bonds with a theoretical value of 20 billion euros.
If Dexia had to offload these urgently, the sales would depress market prices and destabilise trading particularly in the eurozone. About 70 percent of the bonds are bonds issued by the public sector in the eurozone.
Another likely effect would be that Dexia would have to make use of guarantees provided by the French, Belgian and Luxembourg governments. That would mean that these governments would have to repay those debts covered by the guarantees.
The board said that on November 12, the total of the bonds covered by these state guarantees was 73.4 billion euros.