One-notch ratings cut from AA+ to AA. Don’t mention Dexia!
The lowering of Belgium’s long-term rating reflects our view of the potential heightened risks to the sovereign’s creditworthiness emanating from:
- What we see as renewed funding and market risk pressure, which is increasing the perception of difficulties in the Belgian financial sector and in our opinion raising the likelihood that the sector will require more sovereign support. This, in turn, increases the likelihood that contingent liabilities will crystallize on the sovereign’s public balance sheet, in our view. In the context of Belgium’s already high stock of general government debt (anticipated to end 2011 at around 93% of GDP in net terms, and at around 97% of GDP in gross terms), this could potentially push net general government debt above 100% of GDP.
- Risks to the government’s budgetary position, stemming from an increasing likelihood we see that economic growth will slow, given the deleveraging of the European financial sector. With exports of over 80% of GDP, Belgium is one of the most open economies in the eurozone and is therefore in our opinion highly susceptible to any weakening of external demand.
- The ability of authorities to respond to potential economic pressures from inside and outside of Belgium, which in our opinion is constrained by the repeated failure of attempts to form a new government. While Belgium’s caretaker government has implemented temporary measures that have improved the primary fiscal position during 2011, in our opinion it lacks a mandate to implement deeper fiscal and structural reforms.
OK, mention Dexia.
Helped by what we consider to be relatively robust economic growth of around 2%, we expect Belgium’s budget deficit in 2011 likely to be around 3.6% of GDP, which is its 2011 budgetary target. However, we believe that the beneficial effect of favorable budgetary performance on the debt trajectory has been more than offset by the additional cost of the sale of Dexia Bank Belgium to the Belgian state in October this year. The related cost increased Belgium’s debt by 1.1% of GDP, and increased contingent liabilities via the ceiling of related sovereign guarantees to Dexia SA and Dexia Credit Local by about €54 billion. This raises the future amount of outstanding sovereign guarantees to the financial sector to around €90 billion or around 24.5% of GDP at the end of 2011.
There was a bit of confusion when this was released — Reuters flashed that Fitch had downgraded as well. Fitch didn’t. Reuters corrected it quickly. Sorry algos!
Related link:
Belgium steals the Euromess spotlight - FT Alphaville