Belgium’s Credit Rating Lowered by S&P on Bank Rescues, Politics

Belgium’s Credit Rating Cut by S&P on Bank Rescues
Pedestrians pass a store advertising discount sales in the window display, in Brussels, on July 4, 2011. Photographer: Jock Fistick/Bloomberg

Belgium’s credit rating was cut one step to AA by Standard & Poor’s, which said bank guarantees, lack of policy consensus and slowing growth will make it difficult to reduce the euro region’s fifth-highest debt load.

The rating was lowered from AA+, with a negative outlook, London-based S&P said yesterday in a statement. The action by S&P is the first downgrade for Belgium in almost 13 years and puts its credit ranking on a par with the S&P local-currency ratings of the Czech Republic, Kuwait and Chile.

Belgium’s borrowing costs have surged to the highest level in 11 years in the past two months after the nation’s government agreed to buy Dexia SA’s Belgian bank unit and guarantee part of the crisis-hit lender’s liabilities for 10 years. Investors continued a selloff in Belgian bonds after six-party coalition talks ran aground this week as Liberals and Socialists clashed over how to cut the budget deficit.

“One cannot ignore the current political crisis that Belgium is facing, but apart from this, this rating cut also illustrates how banking-sector issues can reverberate on the sovereign,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The question is whether other European countries might follow, given rising tensions throughout the banking sector.”

Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings.

2012 Budget

The yield on Belgium’s 4.25 percent bond due in September 2021 rose 13 basis points to 5.86 percent at 6 p.m. in Brussels yesterday, after reaching 5.88 percent, the highest since February 2000. The extra yield investors demand to hold the Belgian government securities instead of German bunds of similar maturity widened to a record 360 basis points.

The country still doesn’t have a 2012 budget after 531 days of coalition talks focused mostly on tensions between Dutch- and French speakers.

Three days ago, Belgium’s King Albert II turned down Elio Di Rupo’s request to stand down from leading the negotiations and urged the six parties to complete budget discussions and form a government. Di Rupo, 60, the president of the French-speaking Socialists, sought to quit after the Liberals from both sides of Belgium’s linguistic divide refused to accept his latest proposals for a 2012 budget.

Spending Cuts

Those proposals included 6.6 billion euros ($8.7 billion) of additional taxes even as the European Commission told Belgium to focus on spending cuts to narrow its budget deficit, Alexander De Croo, leader of the Flemish Liberal party, told public broadcaster VRT after the talks broke down on Nov. 21.

“S&P’s announcement strengthens even more the need to finalize as soon as possible the 2012 budget,” Belgian caretaker Prime Minister Yves Leterme and Finance Minister Didier Reynders said in a joint e-mailed statement. “Even after this downgrade, the Belgian rating remains one of the strongest in Europe.”

Belgium’s budget deficit will narrow to about 3.6 percent of gross domestic product this year from 4.1 percent in 2010, S&P said. It also forecast government debt will increase to about 97 percent of GDP from 96.1 percent last year after the administration paid 4 billion euros to nationalize Dexia Bank Belgium NV.

Dexia’s Liabilities

Public debt could potentially exceed one year of economic output should government backstops given to banks “crystallize” on the sovereign’s balance sheet, S&P said. Belgium agreed to guarantee as much as 54.5 billion euros of Dexia’s liabilities as part of the joint rescue with France and Luxembourg, both of which are rated AAA by S&P.

The French-Belgian lender, which is being broken up after running out of short-term funding, still had 23.9 billion euros of government-backed borrowings outstanding on Nov. 24, according to data published by the National Bank of Belgium. Some of that debt doesn’t mature before May 2014.

Belgium has also conditionally pledged to buy shares of KBC Groep NV, covering 90 percent of potential losses exceeding 3.2 billion euros on collateralized debt obligations and protection bought from MBIA Insurance Corp.

Brussels-based KBC, Belgium’s biggest bank and insurer by market value, reported a third-quarter net loss of 1.58 billion euros this month. Widening credit spreads led the bank to write down 618 million euros on its structured-credit investments in the quarter.

Bank-Support Measures

Moody’s Investors Service last month put Belgium’s Aa1 rating under review for a possible downgrade, saying the likelihood of additional bank-support measures, the “fragile” market sentiment for highly indebted euro-area nations and slowing growth constituted growing risks.

Fitch Ratings affirmed Belgium’s AA+ credit score as recently as Oct. 20. The ratings company maintained its negative outlook pending a government agreement, saying a “more aggressive” debt-reduction program will be needed.

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