Short-term ratings affirmed at Prime-1; concludes review initiated 07 October
Frankfurt am Main, December 16, 2011 -- Moody's Investors Service has today downgraded Belgium's local-
and foreign-currency government bond ratings by two notches to
Aa3 from Aa1 with a negative outlook, while affirming its short-term
ratings at Prime-1. Today's rating action concludes
Moody's review for downgrade of Belgium's sovereign debt ratings,
which was initiated on 07 October 2011.
The main drivers that prompted the downgrade are:
(1) Heightened risks posed by the sustained deterioration in funding conditions
for euro area countries with relatively high levels of public debt,
like Belgium; and the potential adverse impact these risks may have
on the Belgian government's fiscal consolidation and debt-reduction
efforts.
(2) Increasing medium-term risks to economic growth for the small
and very open Belgian economy due to the need for ongoing deleveraging
and fiscal restriction in the euro area. This is likely to add
to the challenges of placing the country's public debt on a downward
trajectory.
(3) New risks and uncertainties for the Belgian government's balance
sheet stemming from the banking sector, particularly in connection
with the contingent liabilities emanating from the run-off process
of Dexia Credit Local (DCL).
RATIONALE FOR DOWNGRADE
The first driver underlying Moody's decision to downgrade Belgium's
debt rating is the fragile sentiment surrounding sovereign risk in the
euro area. The fragility of the sovereign debt markets is increasingly
entrenched and unlikely to be reversed in the near future. It translates
into heightened potential for funding stress for euro area countries with
high public debt burdens and refinancing needs like Belgium. Sustained
increases in funding costs could also significantly complicate the reduction
of general government deficit ratios to stabilise and reverse Belgium's
high public debt in relation to nominal GDP -- currently close to
100%. Moreover, the probability of further more serious
confidence shocks on the euro area bond markets -- up to and including
sudden stops in funding - have risen recently, albeit from
a very low base.
The second driver of Moody's rating decision is the significant
increase in the medium-term risks to economic growth, over
and above any normal cyclical adjustment, in the small and very
open Belgian economy. This is in part driven by the deleveraging
underway across the euro area financial, corporate, household
and government sectors, and is negatively affecting Belgium's
export demand. Furthermore, uncertainties about the euro
area debt crisis (management) are continuing to negatively impact the
funding conditions for banks with potentially negative consequences for
domestic economic activity. The further weakening economic growth
outlook also complicates the government's ability to achieve its
medium-term fiscal consolidation plans and may necessitate additional
fiscal measures beyond the roughly 11 to 16 EUR billion yearly planned
for the coming three years. This could further weigh on economic
growth. Belgium's recent experience of political bargaining
indicates that consensus on additional measures can be difficult to achieve.
The third driver of today's rating action is the emergence of new
risks which create greater uncertainty around the implications of banking
sector contingent liabilities for the government's balance sheet.
There is a significant risk that the dismantling of the Dexia group,
and especially the run-off process of Dexia Credit Local (DCL),
will result in increases in government debt metrics, although Moody's
notes that the precise extent of any increase remains highly uncertain.
Following the nationalisation of Dexia Bank Belgium (DBB) at a cost of
EUR4 billion in October this year, the Belgian government's
exposure to the group remains considerable through explicit debt guarantees
and loan exposures to DCL through the now nationalised DBB. Combined,
Moody's estimates these current exposures as representing close
to 10% of the country's GDP.
Furthermore, in conjunction with the French and Luxembourg governments,
the Belgian government has agreed to guarantee a large share of the new
funding issued by DCL for a period of 10 years. An agreement to
that effect was announced in October, but the three governments
have since re-opened discussions on the support package and are
moving towards the implementation of a temporary guarantee scheme of six
months with the maximum term of drawings and ceiling recalibrated to the
liquidity needs of the period before putting the definitive guarantee
in place. While Moody's says that the precise outcome of
these discussions is difficult to predict at this stage, the original
agreement and the funding needs of DCL suggest that the Belgian government's
total exposures to the group will likely rise and, in Moody's
views, could reach between 15% and 20% of GDP.
Overall, Belgium's Aa3 rating weighs the mentioned risks against
important strengths, such as the country's net international
creditor status and the relatively healthy balance sheets of the corporate
and household sectors. Moody's also recognises that the recent
talks among the country's eight political parties have finally succeeded
in resolving the longstanding political impasse. With the formation
of a new government, the country may be in a better position to
adopt more sustainable fiscal policies and to undertake structural reforms.
Nevertheless, an immediate and major challenge facing the new government
is the impact of weaker growth on the country's fiscal consolidation
efforts and the resulting need for additional measures to meet the medium-term
deficit and debt reduction targets.
RATING OUTLOOK
The rating outlook is negative due to ongoing risks and uncertainties
for public finances and economic growth in the context of the euro area
debt crisis.
WHAT COULD MOVE THE RATING UP/DOWN
Economic and fiscal policies paving the way for a substantial and sustainable
trend of declining general government deficits with increasing primary
surpluses that lead to a significant reversal in the public debt trajectory
would be credit positive. Conversely, further intensification/crystallization
of the risks constituting the three main rating drivers of today's
rating action would be credit negative.
METHODOLOGY
The principal methodology used in this rating was Sovereign Bond Methodology
published in 2008. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
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Alexander Kockerbeck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
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Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
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Releasing Office:
Moody's Deutschland GmbH
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Germany
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Moody's downgrades Belgium's credit ratings to Aa3, negative outlook
