Debt Crisis Spreading to the Heart of Europe as Belgium Bond Yields Surge

Europe’s sovereign crisis is spreading to the heart of the 16-nation bloc as investors question Belgium’s ability to cut the euro region’s third- highest debt load, overshadowing its economic performance.

The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds of similar maturity has more than doubled in the past four months and widened to 139 basis points yesterday, the most since at least 1993. The Italian spread climbed to a euro-era high of 186 basis points.

The European Union’s 85 billion-euro ($111 billion) rescue package for Ireland has failed to quell market turmoil as investors shift their focus from peripheral states to countries such as Belgium, whose capital of Brussels is home to the EU’s political institutions. While the country’s economy has been among the region’s growth drivers this year, inconclusive elections have left it without a government, raising concerns on its budget outlook.

“Belgium has moved to the foreground as investors ask themselves ‘who’s next?’ to ask for help,” said Carsten Brzeski, an economist at ING Groep NV in Brussels and a former European Commission official. “While there’s little reason for concern based on economic fundamentals, the country’s debt level and political uncertainty added to speculation. Spreads are already at stress levels.”

Belgium’s yield premium is still lower than those of the euro region countries most threatened by the debt crisis. Spain’s spread was at 262 basis points today, Ireland’s was at 659 basis points and Greece’s premium was at 911 basis points.

Unconvinced

Six months after the Greek rescue exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency union, investors remain unconvinced.

Greek Finance Minister George Papaconstantinou last month was forced to announce additional austerity measures, and Irish Prime Minister Brian Cowen has pledged to cut spending by 6 billion euros in 2011 to push down the region’s largest deficit.

In Belgium, seven political parties involved in coalition talks are still sparring over whether to grant more fiscal autonomy for the country’s regions. Its public debt is approaching 100 percent of gross domestic product and 65 billion euros of bonds and bills are due to mature next year, according to data compiled by Bloomberg.

Belgium’s borrowing costs for 10-year bonds rose to the highest level in nine months in a sale of debt on Nov. 29. The treasury sold 945 million euros of bonds due September 2020 to yield 3.72 percent, the most since 3.76 percent in an auction of same-maturity debt on Feb. 22.

‘Self-Fulfilling Prophecy’

“Markets are going from the ones which look really vulnerable to the ones which are slightly vulnerable,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam. “If you’re worried about a country and you don’t want to buy its bonds, its debt-servicing costs will shoot up. There’s a high degree of self-fulfilling prophecy.”

The average interest rate Belgium pays on its outstanding bonds is about 3.7 percent with an average maturity profile of 6 1/2 years, Jean Deboutte, director of strategy, risk management and investor relations at the Brussels-based debt agency, said by telephone on Nov. 29. That’s about 20 basis points more than generic bond yields in the secondary market, according to data compiled by Bloomberg.

Debt-Strapped Nations

Belgium’s 10-year yield premium over German bunds narrowed to 127 basis points today. Credit-default swaps on Belgian government bonds fell to 196.6 from a record 204.9 yesterday, according to CMA data.

The European Commission’s Nov. 29 forecasts show Europe’s sixth-largest economy may outpace the euro region and expand 2 percent this year and 1.8 percent in 2011, helping push down the budget deficit. Gross debt may still reach 100.5 percent of GDP next year, exceeding the EU’s 60 percent limit of GDP.

While EU officials agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt- strapped nations won’t be able to cut deficits fast enough.

“The market is nervous to an extent that any country with a high debt level or a high budget deficit is being punished by investors,” said Christoph Weil, a senior economist at Commerzbank AG in Frankfurt. “European leaders are still underestimating the market dynamics.”

To contact the reporters on this story: Simone Meier in Zurich at smeier@bloomberg.net; John Martens in Brussels at jmartens1@bloomberg.net.

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net; Angela Cullen at acullen8@bloomberg.net.

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