Instant View: S&P says could downgrade Belgium within 6 months

BRUSSELS (BestGrowthStock) – Standard & Poor’s rating agency said on Tuesday Belgium’s sovereign debt could be downgraded within six months if its inability to form a new government persists and its debt trajectory worsens.

The agency added that it had concerns about Belgium’s general fiscal outlook, and specifically its target of reducing its budget deficit to 4.1 percent of GDP next year.

The statement followed a downgrading of Belgium’s outlook to ‘negative’, while its rating of AA+/A-1+ was maintained.

ANALYSTS’ AND ECONOMISTS’ COMMENTS

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

“It’s somewhat more specific than perhaps people think. I would imagine some in the market are now thinking ‘Should there be a ‘B’ in PIIGS?'”

“But, this is much more to do with uncertainty about the future of Belgium and the inability to form a government and the fact that as we go forward they’ve got very high refinancing for next year.

“If there were a more adverse environment in the basic cost of borrowing that would be more problematic given they have a relatively slow trajectory for reducing their outstanding debt.

“For the rating that they’re on, the idea that S&P would (downgrade) more than a notch as they have done with the real problematic people is seemingly unlikely.”

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE IN LONDON

“The market’s all over this sort of risk. It’s the sort of thing that the market is already extremely jittery about and probably priced into Belgium as soon as their government failed, so I don’t see too much impact for a strategic investor.

“Spreads are of course going to go slightly wider on the news as a knee-jerk reaction, but if you’re talking about any impact on their issuance, no, not at all.”

CARSTEN BRZESKI, ING EURO ZONE ECONOMIST, BRUSSELS “I pay less attention to these ratings than I did in the past, but the comment is justified, that’s for sure. Looking beyond the crisis, Belgium does need to reduce its debt and you can only do that if you have a government.

“You cannot be the only country of the euro zone without a government… Belgian politicians need to look beyond their borders and see that there is more at stake than only Belgian issues.

“But all the ratings agencies have lost some of the spirit and are more behind the curve than before. The ratings are important and if they really do a downgrade or an upgrade this has a market impact, but in terms of their economic analysis they have very often fallen behind the curve.

“Their analysis has not the signaling impact it had in the past. It’s already well known — the Belgian issue has already been out there in the open for at least three weeks.

“The impact of their rating has become smaller than it has in the past. We have discussed the situation of Belgium rather excessively — pros and cons of the fundamentals: the high debt, no government, this is clearly a downside risk for Belgium, but on the other side are high savings, still a low fiscal deficit, and that most bondholders are Belgian, not foreign.

“Belgium is different from the rest of the peripheries; Belgium does have problems but of a different nature.

“Looking at the fundamentals the Belgian economy does look to be much more shielded than a country like Portugal; nevertheless having no government, I think already for nine months, does contribute to instability and uncertainty. “Belgian politicians need to get their act together and form a government.”

CHRISTOPH WEIL, EUROPEAN ECONOMIST AT COMMERZBANK IN

FRANKFURT

“I’m not surprised. All European countries are in danger of being downgraded at the moment — particularly Spain and France. Belgium has a high debt level, so it’s not a big surprise.”

DAVID SCHNAUTZ, ECONOMIST AT COMMERZBANK IN LONDON

“In Belgium it’s not just a short-term political hiccup but a structural problem that prevents the formation of a government. The market is difficult and will remain difficult next year. Debt remains high in Belgium and that’s partly a historical issue. Until recently, Belgium made a lot of progress regarding its debt level which has been dealt a blow by the recent crisis.”

“As we’re facing a debt level of nearly 100 percent of GDP, we can’t be surprised that the pressure mounts, if you only are one notch away from a top credit rating. We’re talking about deficits, strong deficits, above 4 percent next year for Belgium. Three years ago you would have said: that’s not possible. Now we’re used to other numbers but it’s still way too high.

“The debt trajectory is heading in the wrong direction. If a bomb explodes elsewhere, no matter where that might be, it’s really difficult for the state to raise funds on the cheap. The timing is interesting, before Christmas, when the market is quite illiquid, that doesn’t make it easier.

“We expect that even a country like France might receive a warning shot from the rating agencies. It’s not just Belgium. Downgrades are only a logical consequence, that shouldn’t shock anyone.

“If we’re only talking about one notch that wouldn’t be too bad but if we’re talking about more steps that would be worse. We have to see the outlook after the downgrade, if one downgrade would be enough to even things out or whether more pressure would mount in such an event.”

NICK KOUNIS, ECONOMIST AT ABN AMRO

“I think the key issue when it comes to Belgium, in contrast to most other euro zone countries, is they don’t really have a serious fiscal consolidation package in place and obviously there’s the political uncertainty and how that relates to whether they will put in place a consolidation package.

“The deficit doesn’t look that bad, but of course the government debt levels are high and at the moment it enjoys the benefit of low interest rates and low debt service costs. But of course there is the contagion risk in what is still quite a vulnerable environment in terms of the sovereign debt crisis.

“I imagine whether they go ahead with it (an S&P downgrade of Belgium) or not really depends on whether we get government action in terms of consolidation.”

Instant View: S&P says could downgrade Belgium within 6 months