‘It’s the beginning of the endgame for…’ Belgium? | FT Alphaville

‘It’s the beginning of the endgame for…’ Belgium?

File this on under Sovereign crisis –> eurozone –> the search for the next Greece.

Sharp-eyed readers may have noticed a little dig in Independent Strategy’s note on sovereign contagion. Belgium, it seems, could be next in line for the contagion treatment, according to the research house:

The countries in the ‘contagion area’ of the Eurozone (namely Spain, Portugal, Greece, Ireland and unexpectedly, Belgium) account for about one-fifth of Eurozone GDP.

In fact, Independent Strategy is advising its clients to basically short the country:

Investors need to take out some insurance against this crisis scenario. Belgium is one country that has stayed outside the fray. Its CDS premia and government bond yields have only just started to rise and even today are only slightly above long-term averages (Figure 5). It is as if most investors still think it’s a slightly second-class Germany.

Second-class Germany. Ouch.

Here are the details behind Independent Strategy’s thinking:

Yet Belgium is a mess. Its sovereign debt to GDP is 100%, up from a trough of 84% a few years ago, and its budget deficit is 5% of GDP. Belgium’s public debt is held abroad to the tune of 69% of GDP and its private sector foreign liabilities are another 162% of GDP, giving a total percentage of foreign credit dependence (charitably excluding inter-company borrowing) only surpassed by the UK and Ireland in the EU (where banks have huge FX liabilities) — see Figure 3. On these ratios, Belgium leaves the PIIGs at the starting block. And Belgium’s overall securitised debt burden (public and private) is only surpassed by that of Ireland (Figure 6).

To stabilise its public debt to GDP ratio, Belgium needs to run an annual primary surplus of 4% of GDP at today’s interest rates and would need an annual primary surplus of 5% if its bond yield rose to the same level as Spain’s. That compares with a current primary budget deficit of 1.3% of GDP.

And there is another special factor for Belgium. Political risks are high. There is no government, the last one having fallen on the usual linguistic sword a few weeks back, and no prospect of one for months. So far, markets, having little understanding of Belgium’s arcane and repetitive linguistic political crises, have cheerfully ignored this one too.

But this time, they are wrong. Unlike the Greeks, who seem to like being Greeks and being in Greece, Belgium is a country with a dearth of nationals proud to be Belgian and where growing swathes of the population want to be in another state of their own creation. This is not a good scenario for taking tough decisions on public debt at a national level and making the necessary political compromises (upon which, along with beer and chocolate, Belgium’s international reputation depends).

Every political crisis brings Belgium close to the cliff edge of being no more — at least as we now know it. It would be unwise to bet the house on this crisis being the ultimate one, but prudent to bet on it being the beginning of the endgame for Belgium.

Much more (again) in the full note, in the Long Room.

From the same file:
Forget about Club Med, Hungary might be next
– FT Alphaville
The UK is the next Greece
– FT Alphaville
Japan is the next Greece
– Seeking Alpha
Malaysia may be the next Greece
– Malaysiakini
The next Greece? It’s the US! – Business Insider
How to know if your country is the next Greece
– CNNMoney
‘Next Greece’ search is on as hedge funds circle – Bloomberg