Just because the earlier posturing on Spain by Moody's did little to kill the euro, here comes S&P, hell bent on succeeding where the other corrupt rating agency failed. Let's see if S&P has any more credibility: the agency has just revised its outlook on the Belgian community of Flanders to negative, mirroring the recent action on the "HoldCo" of Belgium, and making it all too clear that Europe will be pushed to the brink to give on the demands by Luxembourg for a united bond issuance entity before any hopes of a moderation on eurobond spreads can be even considered. And sure enough, the EURUSD pulls its now traditional 100+ bps move in a few hours. For all who wonder where stock volatility has shifted to, we suggest you keep a close eye on the chart below. After all, none other than John Paulson said that FX is the trading product of the future. And, as expected, the respective strengthening in the USD is now causing stock futures to trade down to their day's low.
- We revised our outlook on Belgium to negative on Dec. 14, 2010, reflecting our view of increased risks to the government's creditworthiness due to prolonged domestic political uncertainty.
- The Community of Flanders is the only Belgium community that we rate at the same level as the sovereign. As a result of the sovereign outlook revision, we are also revising the outlook on Flanders to negative from stable.
- We may downgrade Belgium, and hence Flanders, if the central government is not able to stabilize debt and move forward on reforms to improve political cohesion.
On Dec. 15, 2010, Standard & Poor's Ratings Services revised its outlook on the Belgian Community of Flanders to negative from stable. The action mirrors our outlook revision on the Kingdom of Belgium (AA+/Negative/A-1+).
At the same time, we affirmed our 'AA+/A-1+' long- and short-term issuer credit ratings on Flanders.
The ratings on Flanders are still supported by strong management commitment and ability to keep budgets under control and bring them back on balance according to European System of Accounts (ESA) standards by 2011, following imbalances in 2009 and 2010. They also reflect the community's contained, though rising, tax-supported debt, good access to liquidity, and expenditure flexibility.
Also factored into the ratings is our view of the sensitivity of Flanders' revenue base to economic cycles, which is translating into a deteriorated consolidated budgetary performance in the current economic slowdown. In addition, bail-out operations in favor of local financial institutions have
led Flanders to deplete its cash surpluses and to incur a significant amount of debt.
Although Flanders posted a weakened budgetary performance in 2009, owing to both decreasing revenues and bail-out operations, we believe that Flanders' effective budget monitoring and strict cost control have contained the deterioration and we expect this to continue. That said, in our base-case scenario, we continue to estimate that Flanders will post limited and temporary deficits after capital expenditures (including capital injections, which are not taken into account in ESA standards) averaging 3%-4% of total revenues over 2010-2011 on a consolidated basis. (For more details of our base-case scenario, see our full analysis on Flanders published June 29, 2010.)
Flanders uses public and private companies to carry out public-service missions and investments, guaranteeing a number of them and transferring
budgetary funds. Because of this, we analyze debt evolution on a consolidated basis. As we expected, tax-supported debt increased to about 60% of total revenues at year-end 2009 from 29% one year earlier, primarily because of Flanders' debt-financed bail-out of KBC Bank N.V. (A/Stable/A-1) and its new guarantee issuances in social housing and health care. In the next two years, in our base-case scenario, we think tax-supported debt could increase, but we expect it to remain at a moderate level compared with national and international peers.
Flanders accounts for 58% of Belgium's GDP, which exceeds the EU-15 average by 6% per capita in purchasing power parity terms. The community's economy is characterized by high labor productivity and large exports, which has somewhat exposed Flanders, like all Western European regions, to the current economic downturn. GDP fell 3% in 2009 and we expect a slow recovery at 1.9% in 2010, in line with the rest of Belgium.
We view Flanders' liquidity position as strong, with comfortable access to short-term credit in comparison with Flanders' modest debt service. In 2010, the community has two committed credit lines, worth €2.0 billion in total, as well as a €1.5 billion commercial paper program.
The negative outlook mirrors that on Belgium, which reflects the likelihood that a lack of consensus on key policy may result in the government not being able to stabilize its debt trajectory and to move forward on reforms designed to improve political cohesion.
If we were to downgrade Belgium, we would also take the same action on Flanders owing to the current framework for intergovernmental relationships between the central government and local and regional governments and the ensuing limits on their financial autonomy.
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, we could affirm the ratings on Belgium and Flanders.