Belgium may have been spared a downgrade in its credit rating, but financial journalist Laura Cohn warns it is probably too early for investors to buy back into Belgian debt
Nearly two years ago, Jon Corzine, the former Goldman Sachs chief and New Jersey Governor, made a big bet that European bonds would bounce back because he did not believe any eurozone country – other than Greece – would really default on its debt obligations. But Corzine was spectacularly wrong. The company he headed, MF Global, collapsed late last year, along with the rest of the eurozone bond market.
Another casualty of the swoon has been Belgium. With debt levels close to 100 percent of its economic output – the highest in the eurozone, except for Greece and Italy – and a swelling budget deficit, Belgium has seen investors dump its bonds. In mid-January, the country’s 10-year bonds were yielding above 4.5 percent, close to euro-era highs.
“It’s not right to put Belgium in the same basket as Greece and Italy and Spain”
But have investors oversold Belgium? In other words, did Corzine make the right bet, but at the wrong time?
Belgium’s economic fundamentals certainly do not look like they belong to a country with bond yields at nearly five percent which is close to where the debt of Spain, wracked with one of the Continent’s worst housing bubbles, now trades. In fact, some experts say Belgium has been getting a bum rap.
“It’s not right to put Belgium in the same basket as Greece and Italy and Spain,” says Mathias Van der Jeugt, a Brussels-based fixed-income strategist at the Belgian bank KBC.
Even the credit rating agency Standard & Poor’s, which downgraded nine eurozone countries in January, seems to agree. S&P not only spared Belgium from a downgrade, but it praised the diversified, open Belgian economy and the government’s history of paying off its debt.
“The (decision) reflects our view of the country’s wealthy, export-oriented, and competitive economy, a strong track record of fiscal consolidation since the mid-1990s, a high national savings rate, and a net external creditor position,” S&P wrote.
Van der Jeugt said the country’s sky-high savings rate of 17%, the highest in the euro area, is particularly important. A strong household savings rate means a country can raise money to pay off its debt domestically, rather than rely on the fickle nature of international investors. Belgium also has the benefit of being close to Germany, Europe’s strongest economy and Belgium’s biggest trading partner. Serving as a contractor to German industry has helped prevent the Belgian economy from slipping into a recession. In addition, Belgium has finally formed a government after 18 months.
But there are also warning signs for anyone thinking of investing in Belgian bonds. Burned by weakness elsewhere in Europe, the economy is now forecast to contract in the first part of this year before growing again next year.
Analysts don’t think it will be a deep recession, but the longer the eurozone crisis carries on, raising questions about leaders’ commitment to tackle high debt levels throughout the currency zone, the greater the chance the crisis further weighs on the real economy.
“The big risk is that the euro area problems drag on,” says Jens Høj, senior economist and head of the Belgian desk at the Organisation for Economic Co-operation and Development in Paris. “That creates a lot of uncertainty, and investors hate uncertainty.”
For that reason, it’s probably too early for investors to buy back into Belgian debt. Indeed, bond guru Bill Gross, who runs the world’s largest mutual fund at the Newport Beach, California-based investment firm PIMCO, warns investors to focus on US sovereign bonds this year and avoid high-yielding European bonds, which, in his view, have “trap-door possibilities”.
“Government bonds have traditionally been the province of conservative investors”
S&P also warned Belgium could get worse. “There is at least a one-in-three chance we could lower the rating again in 2012 or 2013,” it wrote, adding that the slowing economy could undermine Brussels’ ability to pay down its debt. “A downgrade could occur if general government debt net of liquid assets were to increase above 100 percent of GDP… owing to rising economic and fiscal pressures.”
Government bonds have traditionally been the province of conservative investors, such as pension funds and those near retirement who want a safe place to put their money. For investors in that category, Belgian bonds are now probably anathema. Only those with a stomach for high risk should be thinking about dipping back in.