Interest rates on Belgian government bonds are soaring as is Belgian debt to GDP ratios. Moreover Political bickering compounds the fiscal problems. Some are wondering … Is Belgium “Greece of the North”?

Please consider Political inertia complicates Belgian debt fears

Anxiety is mounting in financial markets that a prolonged bout of political uncertainty in Belgium following national elections next Sunday could prevent decisive action to tackle the nation’s debt mountain that threatens to turn it into “the Greece of the north”.

Interest rates on 10-year Belgian government bonds jumped from 3.15 to 3.50 per cent last week and investors are demanding a mounting premium to hold the debt over corresponding German paper.

Belgium’s debt is currently at 99 per cent of its gross domestic product, the highest in the eurozone after Greece and Italy, and is forecast to exceed GDP by the end of the year.

Yet no political party is campaigning for an explicit belt-tightening mandate. Despite rising unemployment and sluggish growth, the economy has barely featured in the campaign.

“In other European countries you see cuts in public spending. In Belgium that is not happening, and it won’t happen without a government,” says Philippe Ledent, economist at ING in Brussels.

Moreover, the Belgian economy runs a trade surplus, which makes financing debt easier. Household debt is among the lowest in the eurozone. And Belgium has a solid track record of paying down high debt, Ms Leclercq points out.

However, Belgium’s climb out of recession has been slow, with GDP rising by just 0.1 per cent in the first quarter, below the eurozone average. “If this trend continues, Belgium’s fiscal consolidation plans may turn out to rely on overly optimistic growth projections,” says Emilie Gay of Capital Economics. “There is no doubt that Belgium is the weak link of the north,” she wrote in a note last week.

The structure of its debt could add to its problems. Eighty two per cent of short-term paper is owned by foreigners. It has relatively short maturity – under six years – meaning Belgium must return regularly to tap the markets for fresh funds.

Estonia Joins Club Euro

With new Eurozone threats coming nearly every day of the week, one cannot help but wonder about the timing of this announcement: Estonia to Become Euro’s 17th Member as EU Overrides ECB Qualms

European finance ministers endorsed Estonia’s bid to adopt the euro, setting aside the European Central Bank’s warning that the Baltic state may struggle to keep inflation under control.

“Estonia will become the 17th member of the euro area on Jan. 1, 2011,” Luxembourg Prime Minister Jean-Claude Juncker told reporters today after chairing the monthly meeting of euro- region finance ministers in Luxembourg.

The admission of Estonia, a former Soviet republic that joined the European Union in 2004, shows that the EU won’t let the debt crisis in western Europe prevent it from widening the currency bloc to the east.

Political backing for Estonia to adopt the currency next Jan. 1 comes in the face of the ECB’s concerns that Estonia’s inflation rate, at 2.5 percent in April, may jump in years ahead as economic growth outstrips the euro-area average.

One would think (or at least I would) that the Eurozone has enough problems already. Apparently the finance ministers think otherwise, in spite of concerns by the ECB.

Estonia’s policies are geared to “implementing further structural reforms, maintaining fiscal discipline, preserving financial stability and avoiding the emergence of imbalances,” Juncker said.

Hmmm. Where have we heard that before?

Right now the Estonian Kroon is pegged to the Euro so in theory the transition can be smooth. But what about next year? Oh, don’t worry about that. There’s a safety net.

440 Billion Euro Safety Net Now in Place

Inquiring minds are reading Euro-Zone Finance Ministers Strike Deal to Create a Safety Net.

A deal was struck Monday to establish a 440 billion-euro safety net for debt-laden countries in the euro zone, a move that officials hope will calm the markets that have helped prompt a slide in the value of the euro.

For several weeks, there has been uncertainty about the technicalities of a large-scale rescue plan, worth a total of 750 billion euros, or $896 billion, announced on May 10 as the crisis over sovereign debt gathered pace.

Countries would be offered loans only under strict budget austerity conditions such as those imposed on Greece, a stipulation pressed by Germany.

The new fund would be a separate entity based in Luxembourg with the 16 euro-zone governments as its shareholders.

The new facility, to last for three years, is a central element of the 750 billion-euro aid package that euro-area finance ministers agreed to last month. Under the deal that created the package, a further 60 billion euros will come from the European Commission, with 250 billion euros from the International Monetary Fund.

E.U. ministers hope that rating agencies will give the fund a AAA rating, thereby allowing it to offer less expensive financing to struggling nations than the market will offer.

The European Commission, the European Union’s executive body, had wanted to run the new fund, but that idea was blocked by several nations, including Germany, which wanted to keep control of the new facility among national governments.

Two Simple Questions

Excuse me for asking but haven’t we been down this AAA path once before? Oh well, I do note the safety net is just in time to help Belgium and Estonia if needed.

Speaking of which … Is that safety net big enough for Greece, Portugal, Spain, Belgium, Estonia, and Italy?

Mike “Mish” Shedlock
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