01 December 2010

Financial News: And what happens if it gets to Belgium?

As fears grow that the eurozone sovereign debt crisis could develop a momentum all of its own, how long before “plucky little Belgium” – the very heart of the European project – finds itself fighting an economic battle for its own survival? Not so long ago, the mere suggestion that a country like Belgium might end up going the same way as Greece, Ireland, and Portugal, would be absurd.

Per capita, the country is one of the wealthiest in the European Union, it is the seat of the European Commission and the main home of the European Parliament, as well as other international organisations such as NATO. Unlike some smaller eurozone economies, it does not have rampant inflation, has not enjoyed a debt-fuelled spending spree in the past decade and has not witnessed a boom and bust in its property market.

This was underpinned by the numbers. At the end of last year, the credit default swaps on Belgian government debt stood at around 54 basis points (to put that in perspective, the CDS on German debt last week was around 41bps, with Portugal on 477bps).

And yet. In the past few months the markets seem to have spotted something. This year Belgian CDS has more than tripled to 178bps, according to Markit, setting a new record high to its all-time high, jumping 57% in the past month and 34% last 10 days alone. While yields on Belgian 10-year debt are among the lowest in the EU at 3.68%, the spread over bunds has more than tripled this year and this morning broke through the psychologically important 1% barrier - trading at 120bps, jumping 53% in the past month.

With spreads like these, you might still think Belgium is perfectly safe. After all, Spanish CDS is trading at 350bps and Portugal at 545bps. But things can move quickly, particularly if a “negative feedback loop” develops in the trading of European government debt in the same way that it did in the CDS and share prices of US banks in October 2008. Belgium’s CDS of 178bps this week is higher than where Ireland was trading at the end of last year (158bps), and well ahead of both Portugal and Spain at the same time (92bps and 113bps respectively). Spreads over bunds of 1% are where Spain and Portugal were trading in March.

A closer look at Belgium’s numbers gives cause for concern, and was first floated over the summer by the appropriately named Bedlam Asset Management. While it has a relatively low budget deficit (by current standards) of around 6%, its government debt of around €400bn represents 101% of GDP, according to Moody’s – the third-highest ratio in the EU – and is growing. Moody’s said last week that it is getting more requests for its credit research on Belgium.

© Financial News