Standard & Poor’s warned Dec. 14 that Belgium’s mix of high government debt, a high budget deficit and the chronic inability to form a stable government would likely force the ratings agency to downgrade the country’s credit rating (currently at AA+), possibly within six months. Such an event is not yet inevitable, but the mere announcement of the “negative watch” heralds the spread of Europe’s ongoing financial troubles to Europe’s more established states.
Until now nearly all concern for the financial stability of eurozone states has focused on the PIIGS, an acronym investors created to refer to Portugal, Italy, Ireland, Greece and Spain. These states share certain characteristics that include large — and in many cases, popped — bubbles in real estate and finance, high budget deficit and debt levels, and political difficulty in addressing the problems.
To this list of states in distress, STRATFOR would like to add two more developed Western European countries: Austria and Belgium, both of which share key negative characteristics of the PIIGS.
Belgium is certainly the worse off of the two. It suffers from a residential real estate bubble roughly as bad as Spain’s, roughly half again as bad in relative terms as the U.S. subprime crisis. Belgium’s 2009 headline government debt level clocked in at 96 per cent of gross domestic product (GDP), 20 percentage points worse than Portugal — the next PIIGS state that STRATFOR expects will need a bailout. But perhaps most important is that modern Belgium cannot seem to hold a government together. Since the last elections in April 2007 it has had three separate governments, and that does not include the 18 months of interim governments required to hash out coalition deals that were complex and unstable in equal measure. The soon-to-be-mounting obsession among investors is that such political dysfunction will make the austerity required to fix the budget next to impossible.
Austria is better off than Belgium by all of these measures. Its debt and deficit are both considerably lower (68 per cent of GDP versus 96 per cent of GDP and 3.5 per cent of GDP versus 6 per cent of GDP, respectively), its political system is more or less in order, and its housing sector — nearly alone within Europe — was never overbuilt. Austria’s biggest outlier is that its banks are listing badly, due to their overexuberance in lending into the now-popped credit bubble that plagues Central Europe.
(click here to enlarge image) The point that Austria and Belgium have most in common, however, is one they share with the weaker states of the PIIGS grouping: They are largely dependent upon external financing to manage their sovereign debt loads. Austria, Belgium, Greece and Ireland are all relatively small states with limited indigenous financial resources. When a state faces financial duress, the first thing the government does is hash out a deal — often forcefully — with its own financial sector, applying those resources to the problem. Such is standard fare in major states such as Germany and Italy. Smaller states often lack such options, forcing the governments to turn to international investors for cash. In good times this is irrelevant, but when money gets tight and investors get scared, an investor stampede can crush a state’s finances overnight. Such a calamity was precisely what forced the Greek and Irish breakdowns and bailouts. The exposure of all four of these states to such outsiders is more than 50 per cent of GDP, which as Greece and Ireland have already demonstrated so vividly, is an amount that simply cannot be coped with in a panic.
Austria and Belgium are advanced, technocratic economies with sophisticated financial sectors. Any financial contagion that breaks into the developed states of Western Europe via these two countries would terrify investors who have been fairly convinced that the euro’s problems were safely sequestered in the somewhat manageable states of the PIIGS grouping. Should Austria or Belgium go the way of Greece, all bets will be off in Europe.
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