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Dexia Ruling Curbs Likelihood of EU Reprieve on Belgian Deficit

Belgium’s budget deficit surpassed the European Union’s limit last year after a ruling on the accounting treatment of the latest Dexia SA bailout, reducing the nation’s chances of winning more time to bring down its net borrowing.

The government’s 2.92 billion-euro ($3.78 billion) purchase of preferred stock in Dexia on Dec. 31 should be accounted for as a capital transfer and hence be included in the 2012 budget, Eurostat, the EU’s statistics office in Luxembourg, said today. That would inflate last year’s deficit by 0.8 percentage points to about 3.8 percent of gross domestic product, exceeding the 3 percent limit, based on EU forecasts.

While Greece, Portugal and Spain were granted extra deficit-cutting time last year and EU leaders endorsed so-called structural budgetary assessments at a meeting last week, Belgium shouldn’t count on estimates that it has made sufficient reductions in its structural deficit -- a figure that factors out one-offs and the effect on the economic cycle -- to escape a European order to cut more, according to budget forecasts.

“The accounting correction of the 2012 deficit won’t have any impact on the 2013 budget and won’t necessitate additional cuts,” Belgian Finance Minister Koen Geens said in a statement today. “The recapitalization of Dexia was of an extraordinary nature and needed to safeguard the financial stability of the country and the euro region.”

Structural Deficit

Belgium’s benchmark 2.25 percent bond due in June 2023 briefly erased gains after the ruling by Eurostat and the extra yield investors demand to buy Belgian 10-year bonds instead of German debt of similar maturity, the so-called spread, widened 3 basis points to 0.83 percentage points as of 3:43 p.m. in Brussels.

The nation’s structural deficit cuts have lagged behind its own commitments under the EU’s excessive-deficit procedure in recent years. Belgium’s structural deficit will narrow to 2.2 percent this year from 2.7 percent in 2012, according to European Commission forecasts. That compares with Belgium’s own 2013 target of a 1.2 percent shortfall.

Even if the Belgian government manages to avoid resorting to any one-off revenue measures in bringing down its budget deficit to 2.15 percent of GDP this year, it would still fall short of its structural target by about 0.3 percentage points, according to an internal government report that was published on March 8.

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