Bank Bailout Invites Scrutiny of Belgian Credit Risk

The partial nationalization of a Franco-Belgian investment bank confounds the financial difficulties of the Belgian state.

The Franco-German rescue of investment bank Dexia adds to mounting concern about Belgium’s creditworthiness. The dire state of Belgian public finances is compounded by a yearlong political gridlock that has left the country without a proper government since elections last summer.

The nationalization of part of the Dexia bank will cost Belgian taxpayers €4 billion immediately. This adds to the country’s national debt which is almost the size of Belgium’s entire gross domestic product. As such, it’s the third most heavily indebted nation in the eurozone, after Greece and Italy.

On top of the €4 billion, Belgium has pledged guarantees worth up to €54 billion for the remainder of Dexia which has been separated into a nationalized consumer bank and a market investment bank by the governments of Belgium, France and Luxembourg.

The three major American credit rating agencies have warned that the lack of political consensus in Belgium and the expensive Dexia bailout could prompt them to lower Belgium’s credit rating. Belgian credit is rated AA+ by Fitch and Standard and Poor’s with a negative outlook. Moody’s maintains an AA1 rating and changed its outlook to negative on Friday.

Since last year’s parliamentary elections, Dutch and French-speaking political parties in Belgium haven’t managed to form a federal government. The major parties — Flemish nationalist and Walloon socialists — have found very little common ground. The Flemish north, which accounts for roughly 60 percent of Belgian GDP, wants more autonomy from the poorer south where Walloons tend to vote overwhelmingly socialist.

Government spending in Belgium is almost 50 percent of GDP so its ability to borrow cheaply is crucial. The country was able to recover from the global downturn with modest growth rates last year but stimulus measures and subsidies have taken a heavy toll on public finances. Corporate and income taxes in Belgium are high and labor codes are stringent. A national government composed of conservative separatists and socialists is unlikely to address these long-term impediments.