Moody's Cuts Belgium’s Rating on Contagion Risk

Sunday, 18 Dec 2011 06:09 PM

 

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Belgium’s credit rating was cut two steps by Moody’s Investors Service, which said rising borrowing costs, slowing growth and liabilities from Dexia SA’s breakup threaten to inflate the euro area’s fifth-highest debt load.

Moody’s lowered Belgium’s debt rating to Aa3, the fourth-highest investment grade, from Aa1, with a negative outlook, the ratings company said Friday. The action follows Standard & Poor’s one-step downgrade of Belgium to AA on Nov. 25. Fitch Ratings Friday put the nation’s AA+ rating on review for a possible reduction.

The downgrade comes a week after European leaders, in their latest attempt to end the debt crisis now in its third year, agreed to forge a tighter fiscal union as the main thrust of their efforts, even as the European Central Bank resisted investor calls to step up its bond-buying program. Fitch also lowered France’s rating outlook yesterday and put the grades of nations including Spain and Italy on review, citing Europe’s failure to find a “comprehensive solution” to the turmoil.

“The funding environment is an additional risk that we have in this environment,” Alexander Kockerbeck, a senior credit officer at Moody’s, said in a telephone interview from Frankfurt. “The risk is that things can change relatively quickly in the funding market as we have seen in the recent past.”

Borrowing Costs

Belgian borrowing costs touched the highest level in 11 years in November, with the yield on the benchmark 10-year bond closing at 5.86 percent before S&P’s downgrade on Nov. 25. They started surging almost two months earlier as the caretaker government bought Dexia’s Belgian banking unit for 4 billion euros ($5.2 billion) and agreed to guarantee as much as 54.5 billion euros of the crisis-hit lender’s liabilities for as long as 10 years.

The yield on the 4.25 percent securities due September 2021 was little changed yesterday at 4.26 percent. That’s 240 basis points, or 2.4 percentage points, more than German bunds of similar maturity.

Belgium’s economy, the sixth-largest in the euro region, contracted for the first time in more than two years in the third quarter, adding pressure on Prime Minister Elio Di Rupo as he tries to cut the deficit in a bid to stave off contagion from the European debt turmoil. Gross domestic product declined 0.1 percent from the prior three-month period as exports shrank for a second consecutive quarter and consumer spending fell 0.2 percent, the National Bank of Belgium said on Dec. 7.

Budget Deficit

Di Rupo’s government, which was sworn in on Dec. 6, has pledged 11.3 billion euros in spending cuts and tax increases to pare the budget deficit to 2.8 percent of GDP next year, as demanded by the European Union.

“This ambition must absolutely be achieved,” Belgian Finance Minister Steven Vanackere told RTBF radio after the Moody’s downgrade. The government’s 2012 budget was drawn up assuming the economy would expand 0.8 percent.

Belgium forecasts its borrowing needs will fall 16 percent in 2012 after this year’s requirement was boosted by the rescue of Dexia and a higher budget deficit. The nation’s debt agency projected on Dec. 12 that the gross borrowing requirement will amount to 38.6 billion euros next year, down from an estimated borrowing need for 2011 of 46 billion euros.

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