With all the talk of tumbling eurozone dominos, there is increasing chatter about whether Belgium, one of the founding members of the European Union, might feel the same chill winds as Greece, Ireland, Portugal and others on the “periphery” have felt recently.
At first glance, Belgium looks indeed like a contender for trouble. Its public debt is worth 100 per cent of its GDP, the third highest in the eurozone after Greece and Italy. It has had no government since the last one collapsed in April, and no viable coalitions has yet emerged from the ensuing elections.
Worse, those elections were won in the Flemish (Dutch-speaking) region by a political party which wants to dissolve Belgium – or at least weaken the federal government. Local consensus is that Belgians are more likely to have to go to the polls again than to have a government by Christmas.
More in the background for now, the Belgian financial system was among the most battered during the downturn, and further surprises can’t be fully excluded. Belgian banks emerged as some of the most exposed to Ireland, for example. Small exposures can escalate into big problems for a small-ish country.
Amid all this, the bond markets seem remarkedly relaxed. Belgium pays 3.6 per cent a year to finance its 10-year bonds, less than 100 basis points more than benchmark German debt. That’s up a bit over the past few days, but roughly in line with recent months, where it has oscillated between 55 basis points and well over 100. Either way, it is nowhere near the premium investors demand to hold “periphery” countries’ debts.
Belgium-backers put up several explanations for this.
First, though its debt may be high, Belgium’s budget deficit is manageable. At under 6 per cent, it is below the eurozone average, and under half the Irish and ever-revised-upward Greek figure.
Second, high debts and political stalemate are nothing new for Belgium. The government and the administration that supports it are well used to working under peculiar political constraints. Belgium’s debt has always run about 20 percentage points higher than the eurozone average, with little trouble. It may be uncomfortable now, but it is not unexpected.
Third, there are fewer surprises in Belgium than in Greece (with its cooked books) and Ireland (spectacular housing bubble, deficient banks and so on). The fundamentals remain OK; Belgium’s economy is growing quite quickly, aided by a proximity to the buoyant Germans.
Fourth, technical factors. Belgium doesn’t need the international debt markets quite as much as the peripheral countries, because its public debt is partly offset by private savings. In short, it can always lean on domestic sources of capital (i.e. pliant banks) rather than be at the mercy of bond markets. It has little need to visit capital markets in the coming months.
Against that, the nay-sayers have a few arguments, even beyond the gridlock and uncertain banking sector.
Even when a government is formed, there is unlikely to be a strong political consensus on how to cut the debt, and perhaps no agreement any cuts are even necessary. Generally-speaking, Francophones in the south see far less need to slash public services than their northern Flemish neighbours. With seven political parties likely to form the next government, markets are unlikely to get the clear political steer that they prefer.
Most unpredictably, a comprehensive rejigging of the Belgian state, some form of which is likely, could unnerve investors. It looks like a lot of powers will be transferred from the federal level down to the regions. Will the debt also be transferred? Will the regional governments be as diligent as the federal government when it comes to meeting obligations? There are no clear answers to these questions yet.
100 basis points over German debt is nothing to scoff at: in the long term, for a debt of Belgium’s size, that means 1 per cent of GDP effectively wasted on repayments.
But at least for now, there is a difference between paying a smallish premium to jittery investors and being the next domino to fall in the eurozone.
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