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Standard and Poors rating agency just cut Belgium’s credit rating from AA+ to AA with a negative outlook.Reports quickly followed that Fitch had also downgraded Belgium, but those reports seem to have been generated by an error.
That also follows a Fitch downgrade of eight Italian banks.
These are a few of the reasons they give for the downgrade:
- Political instability due to the continuing inability of political parties to form a government.
- High debt aggravated by political stalemate, which has not allowed the government to pass measures that would diminish these debt levels.
- Poor economic conditions across the eurozone.
S&P also writes that Belgium’s rating could be downgraded further if it does not see an end to the political stand-still, it increases its debt-to-gdp ratio, and its debt is infected by the same fears that seem to be spreading across the euro area.
Here’s the full press release:
LONDON (Standard & Poor’s) Nov. 25, 2011–Standard & Poor’s Ratings Services today lowered the long-term sovereign credit rating on the Kingdom of Belgium to ‘AA’ from ‘AA+’, while affirming the short-term rating at ‘A-1+’. The outlook is negative. The transfer and convertibility assessment (T&C) remains ‘AAA’, as it does for all members of the eurozone. The lowering of Belgium’s long-term rating reflects our view of the potential heightened risks to the sovereign’s creditworthiness emanating from:
- What we see as renewed funding and market risk pressure, which is increasing the perception of difficulties in the Belgian financial sector and in our opinion raising the likelihood that the sector will require more sovereign support. This, in turn, increases the likelihood that contingent liabilities will crystallize on the sovereign’s public balance sheet, in our view. In the context of Belgium’s already high stock of general government debt (anticipated to end 2011 at around 93% of GDP in net terms, and at around 97% of GDP in gross terms), this could potentially push net general government debt above 100% of GDP.
- Risks to the government’s budgetary position, stemming from an increasing likelihood we see that economic growth will slow, given the deleveraging of the European financial sector. With exports of over 80% of GDP, Belgium is one of the most open economies in the eurozone and is therefore in our opinion highly susceptible to any weakening of external demand.
- The ability of authorities to respond to potential economic pressures from inside and outside of Belgium, which in our opinion is constrained by the repeated failure of attempts to form a new government. While Belgium’s caretaker government has implemented temporary measures that have improved the primary fiscal position during 2011, in our opinion it lacks a mandate to implement deeper fiscal and structural reforms.
Under our updated sovereign ratings criteria, the “external score” was the primary contributor to the lowering of Belgium’s long-term rating. The scores relating to the other elements of our methodology–political, economic, fiscal, and monetary–did not directly contribute (see “Sovereign Government Rating Methodology And Assumptions,” published June 30, 2011). We think the Belgian government’s capacity to prevent an increase in general government debt, which we consider to be already at high levels, is being constrained by rapid private sector deleveraging both in Belgium and among many of Belgium’s key trading partners.
In our opinion, protracted political uncertainty remains a risk to its creditworthiness, in particular given i) the likely slowdown in economic growth we anticipate for 2012, ii) increasingly difficult financial market conditions affecting most of the eurozone governments and iii) a high level of government debt and its rollover ratio and contingent liabilities related to the financial sector.
Helped by what we consider to be relatively robust economic growth of around 2%, we expect Belgium’s budget deficit in 2011 likely to be around 3.6% of GDP, which is its 2011 budgetary target. However, we believe that the beneficial effect of favourable budgetary performance on the debt trajectory has been more than offset by the additional cost of the sale of Dexia Bank Belgium to the Belgian state in October this year. The related cost increased Belgium’s debt by 1.1% of GDP, and increased contingent liabilities via the ceiling of related sovereign guarantees to Dexia SA and Dexia Credit Local by about €54 billion. This raises the future amount of outstanding sovereign guarantees to the financial sector to around €90 billion or around 24.5% of GDP at the end of 2011.
For 2012, negotiations among the main political parties regarding a precise strategy on how to achieve a budget deficit of 2.8% of GDP have stalled, prolonging the political uncertainty that followed the June 2010 general election. What we consider to be non-negligible progress has been made in several key areas, such as the status of “Brussels-Halle-Vilvoorde” and reform of the intergovernmental framework. Nevertheless, the ongoing disagreements about the formation of a government ultimately reflect in our opinion the lack of a policy consensus across the sovereign’s linguistic and, simultaneously, party divides. The caretaker government is composed largely of political parties that are currently negotiating the formation of the government. We believe that, despite some operational powers exercised by the caretaker government, the prolonged period of political stalemate could reduce the authorities’ capacity to respond resolutely to challenges related to its public finances.
The sovereign’s stability program projects that the primary balance as a percentage of GDP will gradually improve on the back of a decline in the expenditure-to-GDP ratio and a simultaneous gradual recovery in the revenue-to-GDP ratio. In this respect, we believe that a lasting increase in interest rates, which, given the currently difficult financial market environment, cannot be excluded, would require further measures to reduce the primary balance if the targets are to be met in 2012 and beyond.
In our view, this is particularly the case given the relatively high government debt level–-we expect the net debt to hover at around 94% of GDP in 2012-2013 before declining thereafter–and debt rollover ratio (estimated at around 19% in 2011). This is because the past declines in interest payments are likely to be reversed and complicate the prospects for meeting the budgetary targets and stabilizing the government debt trajectory.
We have adopted a base-case macroeconomic scenario, which we view as consistent with the downgrade and the negative outlook. The scenario assumes a slowdown in economic growth in 2012 and gradual recovery thereafter, and the resulting budgetary slippages compared to the authorities’ own plans over the medium term.
We have also adopted a hypothetical downside scenario, which, if it occurred, could lead to a further possible downgrade. This scenario assumes a recession next year, as a result of weaker external and domestic demand, followed by a gradual recovery thereafter. Under this downside scenario, the general government deficit would remain at odds with the government’s fiscal consolidation targets, delaying the decline in the debt trajectory.
We have also adopted a hypothetical upside scenario, which, if it occurred, we believe would likely be consistent with a revision of the outlook to stable. The upside scenario assumes full compliance with the budgetary target throughout the medium term, on the back of stronger economic growth, due to robust domestic demand and continued strength in exports.
For details of all the scenarios, see our analysis on Belgium published Nov. 25, 2011.
Under all three scenarios we expect that Belgium’s high government debt will remain the key rating constraint for the foreseeable future as the net government debt is projected to range between 89% and 99% of GDP in 2014.
Belgium’s ratings reflect our view of the prosperity and diversity of its open economy, which has traditionally operated current account surpluses averaging 2% of GDP, though these have narrowed substantially since the beginning of the decade, when they averaged closer to 4%-5% of GDP. We consider the sovereign’s net external creditor position to be a credit positive.
Our T&C assessment for Belgium, as for all eurozone members, is ‘AAA,’ reflecting our view that the likelihood of the ECB restricting access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy, and which we expect to remain the case in the future.
Rating actions affecting issuer and issue ratings linked to the Kingdom of Belgium’s long-term rating will be covered in a separate press release.
The negative outlook reflects Standard & Poor’s view of ongoing risks to the government debt trajectory linked to rising sovereign support of Belgium’s financial sector. It also reflects our view of a risk to its sovereign creditworthiness due to protracted political uncertainty.
We could lower the ratings further if, consistent with our hypothetical downside scenario, net general government debt were to increase above 100% of GDP, as a consequence of rising economic and fiscal pressures–among other things, due to the continuation of political uncertainty–or reflecting the crystallization of contingent liabilities.
Conversely, we could revise the outlook to stable if, consistent with our hypothetical upside scenario, the authorities comply with the budgetary strategy, risks related to the materialization of contingent liabilities subside, and agreement regarding impending political, fiscal, and structural policy challenges is reached and implemented.