Italian debt fears prompt concern on Belgium

Ireland and Portugal’s recent downgrade to junk status and concerns over Italy’s debt levels have put renewed pressure on Belgium’s economy, analysts argue.

Public debt in Belgium is 97% of its GDP, according to the OECD’s latest survey of the country, and recent events across Europe have put the spotlight on its vulnerable position.

Behind Greece and Italy, Belgium has one of the highest debt piles in Europe.

Should Italy fall, it will be difficult for Belgium to separate itself from contagion, said Legal & General’s emerging markets strategist Brian Coulton. Kathleen Brooks, research director for EMEA at, agrees Belgium is exposed to contagion risk: “Its economy is a fairly small share of the Eurozone as a whole, but it is extremely vulnerable to economic weakness in the currency bloc since it relies on other member nations for 80% of its trade, and exports make up two thirds of its economy,” she said.

Bond markets could punish Belgium, said both Brooks at and Schroders’ European economist Azad Zangana. “It has to issue €110bn of debt in the next three years, which will become harder and more expensive to do, while bond markets continue to punish Eurozone members with high debt loads,” said Brooks.

“For some time now we have warned that should Spain come under pressure and is forced to follow Portugal, Ireland and Greece in seeking a bail out, then Italy, and potentially Belgium, would also be seen as targets by bond vigilantes,” said Zangana.

Spreads between Belgian and German bonds have jumped recently, from a high of 108 basis points(bps) on 30 June to over a 125 bps in just over a week. On 11 July, the difference spiked to reach a peak high of almost 162 bps. That has since dipped, but spreads persist above 150 bps.

According to Coulton, that widening is less relevant for interest costs affecting the Belgian government’s budget since the difference is marked more by German yields having fallen.

Absolute yield is not as problematic at 4.25% for bonds reaching maturity in 10 years, added Coulton. If that hits seven or eight per cent, markets are likely to lose confidence since that has been the psychological tipping point in the preceding cases of Ireland, Portugal and Greece, he said. If Belgium delivers sustained yields of 7%, it will need to consider further tightening, he said.

In June, Naim Abou-Jaoude CEO of Dexia Asset Management which has a large presence in Belgium said its inward investors had not really recovered from the psychological impact of the financial crisis.

“2008 impacted Belgium more than the rest of Europe, with a shift to the short term view and less confidence in the future,” he said.

Belgium’s outlook was lifted on Tuesday when its fiscal deficit forecast for this year was decreased from 3.6% to 3.3% by caretaker prime minister Yves Leterme.

Medium term growth prospects for the country are better than in Italy, said Coulton. Historically, the country has been better able to reduce its debt levels than Italy, which only decreased its debt by about 20% in the 1990s in comparison to Belgium which dropped that debt significantly.

Belgium’s prospects are also lifted somewhat by its close integration with both the French and German economies, which are performing well, added Coulton.

Political weakness is plaguing the country, however. For over a year, it has had no government and a recent attempt to form a coalition failed.

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