Moody's Takes S&P's Place - Downgrades Belgium By Two Notches To Aa3

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Moody's downgrades Belgium's credit ratings to Aa3, negative outlook

Short-term ratings affirmed at Prime-1; concludes review initiated 07 October

Frankfurt am Main, December 16, 2011 -- Moody's Investors Service has today downgraded Belgium's local- and foreign-currency government bond ratings by two notches to Aa3 from Aa1 with a negative outlook, while affirming its short-term ratings at Prime-1. Today's rating action concludes Moody's review for downgrade of Belgium's sovereign debt ratings, which was initiated on 07 October 2011.

The main drivers that prompted the downgrade are:

(1) Heightened risks posed by the sustained deterioration in funding conditions for euro area countries with relatively high levels of public debt, like Belgium; and the potential adverse impact these risks may have on the Belgian government's fiscal consolidation and debt-reduction efforts.

(2) Increasing medium-term risks to economic growth for the small and very open Belgian economy due to the need for ongoing deleveraging and fiscal restriction in the euro area. This is likely to add to the challenges of placing the country's public debt on a downward trajectory.

(3) New risks and uncertainties for the Belgian government's balance sheet stemming from the banking sector, particularly in connection with the contingent liabilities emanating from the run-off process of Dexia Credit Local (DCL).


The first driver underlying Moody's decision to downgrade Belgium's debt rating is the fragile sentiment surrounding sovereign risk in the euro area. The fragility of the sovereign debt markets is increasingly entrenched and unlikely to be reversed in the near future. It translates into heightened potential for funding stress for euro area countries with high public debt burdens and refinancing needs like Belgium. Sustained increases in funding costs could also significantly complicate the reduction of general government deficit ratios to stabilise and reverse Belgium's high public debt in relation to nominal GDP -- currently close to 100%. Moreover, the probability of further more serious confidence shocks on the euro area bond markets -- up to and including sudden stops in funding - have risen recently, albeit from a very low base.

The second driver of Moody's rating decision is the significant increase in the medium-term risks to economic growth, over and above any normal cyclical adjustment, in the small and very open Belgian economy. This is in part driven by the deleveraging underway across the euro area financial, corporate, household and government sectors, and is negatively affecting Belgium's export demand. Furthermore, uncertainties about the euro area debt crisis (management) are continuing to negatively impact the funding conditions for banks with potentially negative consequences for domestic economic activity. The further weakening economic growth outlook also complicates the government's ability to achieve its medium-term fiscal consolidation plans and may necessitate additional fiscal measures beyond the roughly 11 to 16 EUR billion yearly planned for the coming three years. This could further weigh on economic growth. Belgium's recent experience of political bargaining indicates that consensus on additional measures can be difficult to achieve.

The third driver of today's rating action is the emergence of new risks which create greater uncertainty around the implications of banking sector contingent liabilities for the government's balance sheet. There is a significant risk that the dismantling of the Dexia group, and especially the run-off process of Dexia Credit Local (DCL), will result in increases in government debt metrics, although Moody's notes that the precise extent of any increase remains highly uncertain. Following the nationalisation of Dexia Bank Belgium (DBB) at a cost of EUR4 billion in October this year, the Belgian government's exposure to the group remains considerable through explicit debt guarantees and loan exposures to DCL through the now nationalised DBB. Combined, Moody's estimates these current exposures as representing close to 10% of the country's GDP.

Furthermore, in conjunction with the French and Luxembourg governments, the Belgian government has agreed to guarantee a large share of the new funding issued by DCL for a period of 10 years. An agreement to that effect was announced in October, but the three governments have since re-opened discussions on the support package and are moving towards the implementation of a temporary guarantee scheme of six months with the maximum term of drawings and ceiling recalibrated to the liquidity needs of the period before putting the definitive guarantee in place. While Moody's says that the precise outcome of these discussions is difficult to predict at this stage, the original agreement and the funding needs of DCL suggest that the Belgian government's total exposures to the group will likely rise and, in Moody's views, could reach between 15% and 20% of GDP.

Overall, Belgium's Aa3 rating weighs the mentioned risks against important strengths, such as the country's net international creditor status and the relatively healthy balance sheets of the corporate and household sectors. Moody's also recognises that the recent talks among the country's eight political parties have finally succeeded in resolving the longstanding political impasse. With the formation of a new government, the country may be in a better position to adopt more sustainable fiscal policies and to undertake structural reforms.

Nevertheless, an immediate and major challenge facing the new government is the impact of weaker growth on the country's fiscal consolidation efforts and the resulting need for additional measures to meet the medium-term deficit and debt reduction targets.


The rating outlook is negative due to ongoing risks and uncertainties for public finances and economic growth in the context of the euro area debt crisis.


Economic and fiscal policies paving the way for a substantial and sustainable trend of declining general government deficits with increasing primary surpluses that lead to a significant reversal in the public debt trajectory would be credit positive. Conversely, further intensification/crystallization of the risks constituting the three main rating drivers of today's rating action would be credit negative.