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Belgium’s Savers Reinforce Government Yield Drop: Euro Credit

Belgian Minister of Finance Steven Vanackere
Steven Vanackere, Belgium's minister of finance. Photographer: Scott Eells/Bloomberg

Belgium’s savers are stashing away enough money to convince bondholders that the nation’s debt remains lucrative even as the government cuts growth forecasts.

Since December, when savers bought a record 5.73 billion euros ($7 billion) of retail bonds, Belgium’s 10-year yield has fallen to 2.65 percent from an 11-year high of 5.86 percent reached Nov. 25. The yield premium to German debt has narrowed to 112 basis points from 360 in November, helped by lawmakers ending an 18-month standoff to form a government.

“Having a government and having resources to fund your whole budget domestically, that calmed down markets,” said Peter De Keyzer, chief economist at Fortis Bank in Brussels. “As often in the euro zone crisis and with Belgium as well, it’s ‘is the market half-full or half-empty?’ We still have a good relative position compared to other countries.”

Belgians held 229.2 billion euros in savings accounts at domestic banks at the end of July, up 10.7 billion euros from a year earlier, according to the central bank. Domestic ownership of Belgian government bonds rose to 48.3 percent last year from 44.3 percent in 2010 and Belgian investors also increased their holdings of treasury bills to 20.8 percent from less than 10 percent a year earlier, the Brussels-based Debt Agency reported.

Belgian households have a total net worth of 759 billion euros and they sock away about 20 billion euros per year, excluding changes in the value of their investments, according to Julien Manceaux, a senior economist at ING Group NV in Brussels. Savings may increase as the debt crisis makes Belgians more risk averse, he wrote in a note to clients.

Relative Returns

Belgian government bonds have returned 12 percent so far this year, the sixth-best performance in local currencies among 26 markets tracked by Bloomberg/EFFAS indexes. That compares with a 7.6 percent return for French debt and 2.8 percent for German bunds.

Belgium’s deficit still exceeds the levels demanded by European Union rules, and the country must whittle its debt as its economy shrinks and bank bailouts require more financing. Dexia SA’s government-guaranteed debt, backed by Belgium, France and Luxembourg, rose to more than 70 billion euros last year for the first time since October 2009, and the bank also receives central bank loans and other public assistance.

The Belgian government has pledged to shrink the country’s budget deficit to 2.8 percent of gross domestic product in 2012 from 3.7 percent in 2011. Prime Minister Elio Di Rupo’s six-party government remains committed to this target even though it has revised down its growth projections for the year, Finance Minister Steven Vanackere told Belgian lawmakers last month.

Biggest Retreat

The domestic economy contracted less than initially estimated in the second quarter as the biggest retreat of private consumption in more than three years and a depletion of stocks reduced demand for goods made abroad.

GDP in Belgium fell 0.5 percent from the first quarter, compared with an initial estimate of a 0.6 percent decline on Aug. 1, the National Bank of Belgium said today in a statement. The slump in the second quarter, which followed a 0.2 percent expansion in the first quarter, was the biggest in more than three years.

Belgium’s borrowing plan assumes a federal budget deficit of 8.23 billion euros this year. The nation has already completed almost 99 percent of its long-term funding planned this year.

ING’s Manceaux said the financial crisis has given Belgian savers “an unprecedented preference” for safety. Total household net savings are about twice the country’s outstanding national debt, which is also about the same size as annual Belgian GDP.

Credit-Default Swaps

The cost of protecting Belgian debt against non-payment for five years using credit-default swaps has fallen 68 percent from a record on Nov. 25, when Standard & Poor’s cut the nation’s credit rating to AA from AA+. Contracts on Belgium trade at about 137 basis points, reducing the gap with French swaps to 14 basis points from 91 at the start of this year.

Savings waiting in the wings were “a key factor” in last year’s successful retail bond sale, said Laurent Fransolet, head of European fixed-income strategy at London-based Barclays Plc.

Almost 300,000 retail investors piled in to December’s 5.73 billion-euro sale, according to estimates from the debt agency. The offering occurred after caretaker Prime Minister Yves Leterme promoted it in parliament and the future government led by Elio Di Rupo exempted the securities on sale from an increase in the tax rate on interest from fixed-income securities to 21 percent from 15 percent.

“This was a game changer for Belgium,” Fransolet said.

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