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Think BIIGS: There's One Euro Country Under the Radar

Belgium faces an important test Monday, when it aims to sell between 1.5 billion euros ($1.9 billion) and 2.5 billion euros worth of bonds in an auction that will indicate the level of investor confidence in the nation plagued by political turmoil and high levels of debt.

leie river ghent belgium
Keren Su | The Image Bank | Getty Images
leie river ghent belgium

The auction of 2014, 2020 and 2035-dated bonds comes as bond vigilantes are increasingly targeting the country of 11 million people amid concerns over its high level of debt and political instability.

Politicians have been trying since the June elections to broker the formation of a government, but the talks have resulted in complete deadlock and the prospect of new elections is looming.

Belgium could be caught up in the same web as the peripheral euro zone nations of Portugal, Ireland, Italy, Greece and Spain - the so-called PIIGS - if it does not succeed in forming a government soon to reduce the budget deficit through fiscal austerity and bring down its debt, some analysts say.

“If the crisis lasts another three to six months, it will become a problem. Then the structural issues, with an ageing population, become more serious,” Philippe Ledent, economist at ING Belgium said.

Against the backdrop of the euro zone debt crisis, credit default swaps linked to Belgian debt – indicating the cost of insuring Belgian debt against default - rose to a record high this week.

Ledent expects credit default swap spreads to widen further if a government is not formed soon.

The premium investors demand to hold 10-year Belgian government bonds rather than euro zone benchmark German Bunds has also risen since September on worries about the country's political outlook.

'Outstanding Challenges'

In its latest report on Belgium, rating agency Standard & Poor’s wrote that its AA+ rating on the country’s long-term debt – the second-highest rating at the agency – could come under downward pressure if a continued political stalemate were to diminish the authorities' capacity to address the “outstanding challenges”.

With no federal government in place to draw up a new budget, S&P fears the country will not be able to reduce its deficit through a series of austerity measures and bring down its debt.

Public debt is just under 100 percent of gross domestic product, the third-highest in the European Union, with only Italy and Greece preceding it, EU data showed.

The lack of a government means Belgium is losing precious time when reforms are badly needed, BNP Paribas Fortis economist Steven Vanneste said.

“With higher-than-expected growth of 2 percent, a government could have taken steps towards reform of the pensions system,” he added.

But it's not all bad news. Regional governments with considerable powers remain in place, the 2010 budget deficit is forecast at 4.8 percent of GDP – well below that of the peripheral euro zone countries - and the country has significant exposure to fast-growing Germany.

No Government = No Spending?

“The situation is very different from Greece, Portugal and Ireland. We can never exclude speculation, but fundamentally it is hard to justify such speculation,” Ledent said.

Belgian long-term debt also has the second-highest rating at Moody’s rating agency, which rates it at Aa1.

“There is a political risk, and it is taking very long (to form a government), but there is no chance of default right now,” Vanneste said.

The latest data for 2011 show that Belgium’s debt level will continue to hover around 100 percent of GDP.

“This is of course a problem," Ledent said. "But the 2010 budget deficit will probably be around 4 percent next year…And contrary to the peripherals we are fully benefiting from German growth.”

“Contrary to some comments, the fact that we don’t have a government is not bad for our public finances…there may be no austerity, but there will also be no spending,” Ledent added.

Vanneste agreed there was no real risk in the short term, as Belgium would be able to meet 2010 and 2011 commitments to cut its budget deficit.

The country has until 2012 to bring the deficit back under the EU’s ceiling of 3 percent.

“That will not be possible without a government,” Vanneste said.

Contact Europe: Economy

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