Belgium Outlook Raised to Stable by Fitch on Deficit Cuts

Belgium had the outlook on its AA credit rating raised by Fitch Ratings, which cited deficit reductions and a decrease in borrowing costs amid contained risks from bank rescues and the euro-area debt crisis.

Fitch affirmed Belgium’s AA rating and revised the outlook on the nation’s debt to stable from negative, according to a statement yesterday. Belgium’s budget deficit probably narrowed to 2.9 percent of gross domestic product last year and its public debt may have peaked at close to 100 percent of GDP, Fitch said.

“Public debt, Belgium’s main rating weakness, has peaked in 2012/2013, earlier and only moderately higher than in France and the U.K.,” Fitch analysts Michele Napolitano and Douglas Renwick, who are based in London, said in the statement. “Debt dynamics are relatively robust to stylized shocks, mainly owing to a primary surplus in 2012.”

Investors have rewarded Belgium for sticking to its deficit targets since it took the country a record 541 days to form a government after the June 2010 elections. It sold 10-year bonds at a record-low yield of 2.252 percent in the most recent auction on Nov. 26. The 10-year yield fell 3 basis points to 2.34 percent at 9:12 a.m. in Brussels, compared with last year’s high of 4.66 percent on Jan. 6, 2012.

As measured by credit-default swap prices compiled by Bloomberg, Belgium’s debt is now a better credit than France, rated two steps higher at AAA by Fitch. Investors often ignore ratings, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.

Sovereign Yields

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published on Dec. 17. Investors ignored 56 percent of Moody’s Investors Service rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

A deterioration of the credit quality of Dexia SA’s residual assets, a prolonged political standstill following the 2014 elections and a further loss of competitiveness are the main risks to Belgium’s rating, Fitch said.

Recent government steps to rein in private-sector salary increases and at the same time preserve an automatic link between wages and inflation “do not address the competitiveness gap,” Fitch said.

The rating company’s 2012 deficit estimate assumes that the nation’s 2.92 billion-euro ($3.89 billion) purchase of preferred shares in Belgian bank Dexia will be treated as a financial transaction and can thus be excluded from the budget figures. A final ruling by Eurostat, the European Union statistics office, will be made in April, Fitch said.

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