Fitch Ratings is providing further comment on the rating actions it took earlier today on the Kingdom of Belgium (Belgium), where its Long-term Issuer Default Rating (IDR) was downgraded to 'AA' from 'AA+', Negative Outlook, and its Short-term IDR was affirmed at 'F1+'.
The downgrade follows the Rating Watch Negative (RWN) placed on the sovereign ratings of Belgium and five other Euro Area Member States (EAMS) on 16 December 2011. The RWN was initiated in response to concern over the lack of clarity on the ultimate structure of a fundamentally reformed Economic and Monetary Union; the risk of self-fulfilling liquidity and even solvency crises in the absence of a fully-credible financial 'firewall' against contagion; and the significant negative external shock to the region's economy from the prolonged nature of the eurozone systemic crisis.
The one-notch downgrade to 'AA' reflects a re-assessment by Fitch of the potential financing and monetary shocks that members of the eurozone face in light of the increasing divergence in economic, monetary and credit conditions and prospects across the region, which is also a factor in the downgrades of some other eurozone sovereign governments.
At around 19% of GDP (including short-term debt), Belgium's 2012 financing requirement relative to output is the fourth highest in the eurozone, after Greece, Italy and Portugal. This leaves the Belgian sovereign relatively vulnerable to refinancing risk, when compared with higher-rated eurozone peers.
In the last months of 2011, renewed financial tensions in the eurozone and political uncertainty in Belgium led to a sharp - albeit temporary - spike in financing costs. Although yields have since normalised, volatility in the context of the eurozone crisis continues to be high.
Concerns around the stability of Belgian banks have resurfaced with the nationalisation of Dexia Bank Belgium giving rise to an up-front increase in debt of 1.1% of GDP, and funding guarantees on the residual bank representing a material contingent liability to the state. While the state support extended to Dexia in 2011 has alleviated immediate funding pressures, the group still has a significant legacy bond portfolio, which could lead to additional impairments and write-downs.
Belgium formed a new coalition government in December 2011, ending a record 541 days of political deadlock. A key milestone of the new government was an agreement on state reforms, as well as the 2012 budget including pension and labour market measures.
Fitch recognises Belgium's track record of sustained fiscal consolidation and debt reduction during the 14 years prior to the current financial crisis. The agency expects the government's 2.8% of GDP 2012 deficit target to be met with existing measures, and for authorities to supplement any future consolidation shortfalls with extra measures to achieve budget equilibrium by 2015. According to Fitch's baseline projections, public debt is placed on a downward trajectory from 2013 and will continue converging towards the eurozone average in the medium term.
The Negative Outlook primarily reflects the risks associated with a further intensification of the eurozone financial crisis, although today's action incorporates Fitch's expectation that the crisis will be prolonged and punctuated by further episodes of market volatility. Material slippage against fiscal targets could result in another ratings downgrade, as would a sizeable increase in state banking system support. Conversely, a moderation of the crisis, and success at placing public debt/GDP on a downward trajectory would help stabilise the Belgian sovereign at the 'AA' level.
Belgium's rating is underpinned by its structural strengths including its advanced, diversified economy with high income per capita, high domestic savings and low private sector debt. The economy's strong external balance sheet, as reflected in
