Political divisions threaten Belgium’s deficit-reduction targets
LONDON (MarketWatch) — There’s no ‘B’ in PIIGS, but Belgium could eventually cause headaches of its own for the euro zone if a bitter and protracted political fight prevents the country from hitting its deficit-reduction targets.
Worries about sovereign debt have dogged the 16-nation single-currency area since late last year, spurring a 110 billion pound ($154 billion) bailout for Greece and the creation of a €750 billion emergency fund by the European Union and the International Monetary Fund to serve as a backstop for other problems.
Greece was at the center of the spring crisis and recent attention has focused on the travails of Ireland and worries about Portugal. While high-debt Spain and Italy have missed out on the worst of the recent turmoil, their borrowing costs remain elevated. Economists have lumped those unfortunate countries together under the unflattering acronym, PIIGS.
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Belgium, in northern Europe, has seemed an unlikely candidate for sovereign-debt troublemaker. From a fiscal perspective, the country, whose capital Brussels is the home of the vast EU bureaucracy, has been associated more with the so-called core of the euro zone than the troubled “periphery.”
But an increasingly bitter political divide along linguistic lines has left Belgium without a government since April and is beginning to raise some concerns.
Belgium, which has enjoyed solid growth, appears on track to reduce its budget deficit to 4.8% of gross domestic product this year from 5.6% in 2009, economists said. The nation’s deficit is among the lowest in the euro zone and compares well with other core countries, including Germany at 4.5% of GDP, France at 8% and the Netherlands at 6%.
But if a government isn’t formed soon, the 2011 fiscal target of a reduction to 4.1% could be in jeopardy, said Philippe Ledent, an economist at ING Bank in Brussels. That in turn would make it all the more difficult for Belgium to meet its target of bringing its deficit down to 3% of GDP, the EU limit, in 2012.
“So up till now the lack of a government was not so problematic, but it will become more problematic” if not resolved soon, he said.
Negotiations continue. But this is the time of year a new government would be unveiling its budget plan for 2011. Continued delay would likely result in an extension of the 2010 budget into 2011, Ledent said, which would translate into a 2011 deficit of 4.6% of GDP, half a percentage point off the nation’s target.
Belgium’s deficit figures raise few alarms, but government debt stands at around 100% of GDP, which compares more closely with Greece and Italy.
Unable to form a government
After the previous government fell in April, an election was held in June. But subsequent efforts to form a new government have repeatedly foundered as party leaders have been unable to overcome deepening divisions between Dutch-speaking Flanders in the north and French-speaking Wallonia in the south.
The New Flemish Alliance party, or N-VA, which favors the secession of Flanders from Belgium, was the top vote-getter in Flanders. They’ve pressed Walloon politicians for more fiscal independence in the nation’s three regions -- Flanders, Wallonia and Brussels.
The French-speaking Walloons fear that would put them at a disadvantage to their already-richer Flemish neighbors and view the N-VA’s demands as a precursor to splitting the country.
Belgium has had no problems selling its government bonds. Borrowing costs have risen, however, with the yield premium demanded by investors to hold 10-year Belgian debt over benchmark German bunds standing at around 0.8 percentage point, up from around 0.4 percentage point around the same time last year.
But borrowing costs are far from problematic, Ledent said. Belgium’s premium remains nowhere near comparable to Spain’s, for example, which is at around 1.6 percentage points, much less Ireland’s at around 4 percentage points.
The cost of insuring Belgian debt against default is up sharply since the April elections, but well off the peak seen in mid-June. The spread on five-year sovereign credit-default swaps was at 119 basis points last Thursday, according to data provider CMA. That means it would cost $119,000 a year to insure $10 million of Belgian government debt against default for five years.
The spread stood at around 60 basis points in mid-April before the latest round of political turmoil and peaked at 149 basis points in late June.
“Up to now, there has been no strong impact [on borrowing costs], but I’m not sure it will continue like that,” Ledent said. “If in two, three, four months we still don’t have any government, financial markets will consider that we won’t reach the [budget] target and then there could be an impact on the spread.”
Economists emphasize that Belgium still has some significant advantages over the peripheral economies. Belgium has a highly competitive external sector and a culture of savings means very low household debt, said Emilie Gay, European economist at Capital Economics.
That bodes well for Belgium’s growth outlook and means it will be easier for the nation to weather fiscal tightening, she said, compared to beleaguered peripheral economies, which will see deficit-reduction efforts complicated by weak growth.
But longer-term dangers remain, Gay said. If worries deepen over peripheral euro-zone economies, a further round of problems in Belgium could see debt worries creeping into the core, potentially infecting France and other countries.
William L. Watts is a reporter for MarketWatch in London.
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