Next On The Downgrade Docket: Belgium

With so much of the attention once again focused on Europe's periphery (which somehow the efficient market could not be bothered with for about 4 months, even though it was all there, staring people in the face all along), it may be time to recall the Europe's core is just as troubled as everything else. Some may recall that back on December 14, S&P came out with a bit of a stunner (which in retrospect looks rather tame following the now forgotten warning on the US Debt): "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." Well, it is now 6 months later, and Belgium still has no government. Time to pull the switch?

Bloomberg chimes in on the imminent downgrade of the world's longest anarchy:

“There’s a downgrade looming,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf. “The market appears to have become really complacent regarding the issue. This may become an issue again if a downgrade is to come.”

Europe’s sovereign-debt crisis, which forced Portugal this month to follow Greece and Ireland in accepting a European Union-led bailout, has overshadowed the political standoff in Belgium triggered by inconclusive elections last June. A strengthening economic recovery has helped  shrink the deficit, though reducing the debt will require political resolve.

“It’s hard to convince investors in the market that you’re going to tackle your debt problem when you don’t have effective leadership or a team in place that could introduce such measures,” Leister said.

Will the Belgian downgrade impact its, and other peripheral bonds?

While Leterme has been unable to pass meaningful spending cuts, Belgium’s bonds have beaten those of most countries in the region this year. The debt is little changed, the third-best among the 11 major euro-denominated nations tracked by Bloomberg and the European Federation of  financial Analysts Societies. German debt lost 1.2 percent in the period, the indexes showed,with Greek securities losing more than 11 percent.

“At the moment, the market’s giving Belgium the benefit of the doubt,” said Peter Allwright, head of absolute rates and currency at RWC Partners Ltd., a London-based asset-management company that oversees about $4 billion. “The perception is that Belgium has time. It’s a developed market with a wide distribution, and investors are happy to hold onto the securities.”

The extra yield, or spread, on Belgian 10-year bonds over German bunds has fallen from a euro-era high of 144 basis points to 109.5 yesterday. That compares with an average of 86 for the past year.

“The possible influence of the political situation on spreads has been compensated for by the Belgian fundamentals, which have continued to improve since the beginning of the year,” Anne Leclercq, director for treasury and capital markets at the Belgian debt agency, said in an e-mailed response to questions. “We plan to issue 34 billion euros ($49 billion) this year. We have now done 53.4 percent.”

One thing is certain: the downgrade is coming:

Five months after S&P set its deadline, there has been little progress in resolving the impasse between the country’s French-speaking and Flemmish political forces, raising the risk of a rating reduction that could further boost the country’s borrowing costs.

Belgium has been without a fully-empowered government for 331 days since an inconclusive election in June. Its political class -- led by Flemish nationalist Bart De Wever, the top vote- getter in the Dutch-speaking north, and Socialist Elio Di Rupo, the winner in the French-speaking region -- has been unable to break the deadlock and forge a coalition.

Of course, in communist central planning, ponzi runs market:

Foreign ownership of the nation’s bonds and treasury bills increased to 71.2 percent from 59.6 percent in the past decade, according to central-bank data.

“A rush for the exit by foreign investors is a key market risk,” Leister said. “We have seen with other peripheral markets that they’re the first to rush out of the door. This could repeat itself, in the same direction, maybe not in the same magnitude.”

Look for much of nothing to happen when yet another warning sign is promptly digested by the market as the proletariat of central bankers sell a few more Treasury puts to make the market believe all is well for as long as possible.

h/t Mike