Contagion Is Back As S&P Threatens To Downgrade AA+-Rated Belgium Within 6 Months If No Government Formed
And so European contagion is back as S&P, now clearly with a mandate to remind that Europe is in a heap of trouble every month or so, puts Belgium on Outlook negative, saying that it is basically just a matter of time before the country loses its AA+ rating. The bogey: 6 months, which likely means that around May of next year, just like a year prior, we will see the same fireworks out of Europe, only this time not from Greece, but from the very heart of what is left of a solvent continent. "If Belgium fails to form a government soon, a downgrade could occur, potentially within six months. Should a government be formed but is, in our opinion, ineffective in its fiscal stance or devolution, we are likely to consider rating action within two years." Sure enough, the EURUSD does nothing on the news.
- A better-than-anticipated 2010 fiscal outcome contributed to our affirmation of Belgium's 'AA+/A-1+' ratings.
- However, we anticipate that prolonged political uncertainty could hurt Belgium's credit standing.
- Accordingly, we have revised our outlook on Belgium to negative.
On Dec. 14, 2010, Standard & Poor's Ratings Services revised its outlook on the Kingdom of Belgium to negative from stable. At the same time, Standard & Poor's affirmed its 'AA+' long-term and 'A-1+' short-term ratings on Belgium. The 'AAA' transfer and convertibility assessment on Belgium is unchanged.
We believe that Belgium's prolonged domestic political uncertainty poses risks to its government's credit standing, especially given the difficult market conditions many eurozone governments are facing. We view Belgium's political uncertainty as primarily evidenced by the prolonged delay in forming a federal government after the June 2010 general election as well as the prolonged inability to form a key policy consensus across Belgium's linguistic divide. These key policy areas include, among others, intergovernmental fiscal arrangements, the status of the Brussels-Halle-Vilvoorde bilingual voting district, and devolution in social security, health care, and labor market regulation.
We believe that this prolonged political uncertainty would have been more detrimental to the government's credit standing were it not for Belgium's capable and strong institutions--both at the federal and regional levels. In our view, these positive factors are helping the government fall below its 2010 general government fiscal deficit target of 4.8% of GDP. Better-than-anticipated economic growth of about 2% this year has also helped Belgium's 2010 budget outturn. Exports have fueled this growth, as external demand from Belgium's neighbors and chief trading partners is strengthening, too. Lower-than-budgeted nominal interest rates have contributed to the 2010 fiscal outturn as well.
However, we see risks to the government's 4.1% of GDP fiscal target for 2011 and to Belgium's fiscal stance generally. Notwithstanding an apparent consensus across political parties on the need for continued fiscal consolidation and government net debt reduction from the current high level of 94.6% of GDP, we believe Belgium's current caretaker government may be ill-equipped to respond to shocks to public finances. In our view, the federal government's projected 2011 gross borrowing requirement of around 11% of GDP leaves it exposed to rising real interest rates. On the other hand, we currently do not expect further government support for the nation's banking sector beyond that already extended after the 2008/2009 global recession. We also note that Belgium was in an estimated net external creditor position of around 51% of current account receipts at Dec. 31, 2009.
We could lower the sovereign rating on Belgium one notch if we conclude that the lack of consensus will result in the government not being able to stabilize its debt trajectory and to move forward on reforms designed to improve political cohesion. If Belgium fails to form a government soon, a downgrade could occur, potentially within six months. Should a government be formed but is, in our opinion, ineffective in its fiscal stance or devolution, we are likely to consider rating action within two years. On the other hand, if we believe that the government's debt trajectory has stabilized or will improve and if some progress is made on other areas important for strengthening the social contract, ratings could stabilize at current levels.