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Belgium Latest Contagion Crisis, As 10 Year Bond Spreads Go Vertical

Tyler Durden's picture




 

The latest casualty of the European contagion is sleepy, quiet, french-fry and beer specialist Belgium. The country's 10 Year bonds have gone vertical on ever increasing concerns the European core is just as messed up as the periphery. Look for this hockeysticking to add even more tightness to German Bund spreads, until one day the market wakes up and realizes the only country it can now short is Germany itself. That will be game over for Europe.

In the meantime, focusing on Belgium, here is what the FT had to say:

Anxiety is mounting in financial markets that a prolonged bout of political uncertainty in Belgium following national elections next Sunday could prevent decisive action to tackle the nation's debt mountain that threatens to turn it into "the Greece of the north".

Interest rates on 10-year Belgian government bonds jumped from 3.15 to 3.50 per cent last week and investors are demanding a mounting premium to hold the debt over corresponding German paper.

Belgium's debt is currently at 99 per cent of its gross domestic product, the highest in the eurozone after Greece and Italy, and is forecast to exceed GDP by the end of the year.

Officials play down the market concerns. Anne Leclercq, head of the Belgian debt-issuing authority, blames broader eurozone debt worries and "hyper-volatile markets" for the jump in interest rate spreads last week.

"The overall level of our sovereign debt is indeed high, but the budget deficit is good," she says. Deficit projections for 2010 and 2011 are around 5 per cent - more in line with Germany than with those countries at the heart of the eurozone debt crisis.

Moreover, the Belgian economy runs a trade surplus, which makes financing debt easier. Household debt is among the lowest in the eurozone. And Belgium has a solid track record of paying down high debt, Ms Leclercq points out.

However, Belgium's climb out of recession has been slow, with GDP rising by just 0.1 per cent in the first quarter, below the eurozone average. "If this trend continues, Belgium's fiscal consolidation plans may turn out to rely on overly optimistic growth projections," says Emilie Gay of Capital Economics. "There is no doubt that Belgium is the weak link of the north," she wrote in a note last week.

The structure of its debt could add to its problems. Eighty two per cent of short-term paper is owned by foreigners. It has relatively short maturity - under six years - meaning Belgium must return regularly to tap the markets for fresh funds.

All in all, the perfect setting for ECB deposit facility issuance to increase by another €50 billion just in time for tomorrow's open.

h/t Slilm Beleggen

 

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Mon, 06/07/2010 - 08:32 | 399341 SWRichmond
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So Saison Dupont and Cuvee Van De Kaiser Blauw are going to get cheaper?  Sweet!

Mon, 06/07/2010 - 08:55 | 399367 TomB
TomB's picture

Belgium has elections on Sunday, things could get quite interesting after that as the next government (if they can form one - last time it took 194 days) will probably not work much better than the last one.

Mon, 06/07/2010 - 09:13 | 399392 plongka10
plongka10's picture

The Netherlands also have elections this week with some changes to the status quo anticipated.

Mon, 06/07/2010 - 10:09 | 399478 Double down
Double down's picture

Ahhhh great, just great.

Mon, 06/07/2010 - 08:57 | 399372 cm44888
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How fitting. The Red Army is bearing down on Hitler's bunker.

Mon, 06/07/2010 - 09:07 | 399385 papaswamp
papaswamp's picture

How soon for this to hit the US?

"Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s."

http://www.bloomberg.com/apps/news?pid=20601109&sid=aa0cI64Gx.4E&pos=15

Mon, 06/07/2010 - 09:21 | 399408 ElvisDog
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Officials downplaying investor concerns = Kevin Bacon saying "All is well" in the movie Animal House.

Mon, 06/07/2010 - 09:23 | 399418 ZackAttack
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3.5%?

 

And they consider this a problem? They should be thankful to the Bond Gods that their coupon is anywhere below double digits.

Mon, 06/07/2010 - 10:58 | 399579 sheeple
sheeple's picture

"The overall level of our sovereign debt is indeed high, but the budget deficit is good," she says

 

Translation: 'I'm fat and ugly, but being fat and ugly is good'

Mon, 06/07/2010 - 13:02 | 399899 sbagp
sbagp's picture

fiscal surplus is soo passé..... deficits are so in, baby...!  But way to say it before your sale of bonds and notes.

Mon, 06/07/2010 - 13:10 | 399924 BlackBeard
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Their chocolates are overrated.

Tue, 06/08/2010 - 03:21 | 401096 GoldBricker
GoldBricker's picture

I've lived in the area for about 10 years. The bar chocolate is of poor quality compared to certain neighboring countries (Switzerland, Germany) and the big-name boxed chocolates (the stores that are on the tourist circuit) aren't that great either. What stands out is precisely what is available only here: the boxed chocolates from small, family-run shops that you've never heard of.

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