Sun, Nov 27, 2011 page11

• Budget deadlock in Belgium ends after rating cut

  MOVING FORWARD: The budget deal moves the country closer to forming a government after more than 500 days of talks and a recent credit downgrade

  • Bloomberg and AFP, BRUSSELS
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  Belgian politicians reached a deal on next year’s budget yesterday, ending a 19-month deadlock that had prevented the formation of a stable government and led to a debt downgrade, a negotiator said.

  “There is an agreement,” a spokesman for the French-speaking socialists, one of six parties in the linguistically divided country that had been struggling to reconcile spending cuts with tax rises.

  The accord, reached after 17 hours of negotiations, opens the way to forming a new government after more than a year-and-a-half in caretaker management.

  Friday night’s downgrade by ratings giant Standard and Poor’s (S&P), which saw Belgium drop by one notch to “AA,” piled pressure on the parties to reconcile spending cuts with tax rises to avoid EU penalties next month.

  S&P 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 on Friday 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 sell-off in Belgian bonds after six-party coalition talks ran aground this week as Liberals and Socialists clashed over how to cut the budget deficit.

  Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year.

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

  Several days ago, Belgium’s King Albert II turned down French-speaking Socialist Party leader 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 sought to quit after the Liberals from both sides of Belgium’s linguistic divide refused to accept his latest proposals for the budget.

  Those proposals included 6.6 billion euros (US$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 Monday.

  Belgium’s budget deficit will narrow to about 3.6 percent of GDP this year from 4.1 percent last year, 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.

  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 Thursday, 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 the nation’s biggest bank and insurer 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.
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