Brussels blog

Eurozone governments: Are “the markets” refusing to lend to you? Turn to “the people” instead.

That is in essence what Belgium is proposing to do, with an appeal to retail investors (i.e. you) to buy the sovereign bonds it is struggling to sell to institutional investors (i.e. Goldman Sachs).

Yves Leterme, prime minister, plugged the bonds-for-the-people in the local press on Thursday, arguing they were a particularly good deal now that Belgium’s institutional muddle has helped send yields to attractive levels.

For those who have not been following Belgian politics in the past 577 days, the country has been run by a caretaker administration since April 2010 while its political class tries to cobble together a new government.

The dithering – as well as the broader eurozone crisis – has pushed yields on 10-year bonds to 5.6 per cent, some 3.4 per cent higher than Germany pays for its own debt. That “spread” used to be around 1 per cent just this summer, and its meteoric growth shows that Belgium is now half-way to becoming a peripheral country like Spain or Portugal (hence the new acronym for the laggards: Manneken PIIGS).

5.6 per cent is not a bad yield, particularly now that banks are offering piddling rates for savers. The bond aimed at retail investors will actually have a slightly lower benchmark yield, at 4 per cent (big banks get better deals because they buy billions at a time) up from 3 per cent previously.

The idea of selling government bonds to the populace is not new, even in Belgium:its debt agency has four issues a year targeted to retail investors. But clearly the hope is to appeal to the patriotic fervour of those citizens incensed about “the markets” asking ever-higher yields to hold Belgian debt.

Sadly for Belgium, the amounts are unlikely to be significant, despite its citizens’ considerable savings. Previous bond issues attracted a mere €80m, a drop in the ocean of its €300bn debt, equal to a year’s economic output.

Brussels Blog doesn’t give investment advice, but it will share this insight: the chances of a default on a government bond are generally pretty low. The chances of a default, or even a haircut, on a government bond aimed specifically at retail investors are even lower. If inflation stays at current levels – rather a big “if”, admittedly – the 4 per cent on offer may look rather appealing.

UPDATE: Standard & Poor’s downgraded Belgium Friday evening, prompting a budget deal by the main political parties – and probably a government this week.

The bond issue for the wider public has attracted €705m in just two days, nearly ten times the previous amount raised over two weeks. It has been heavily covered in the news, so the figure is likely to go up far, far further.