2023-08-08 00:05:13
In a few weeks, the Fitch agency will reassess Belgium’s rating. The parallels with the causes of the downgrading of the United States’ rating are numerous.
“Standards of governance have steadily deteriorated over the past 20 yearsin particular with regard to budgetary and debt issues.” Last week, it was with these words that Fitch Ratings justified its downgrading of the United States’ rating from AAA to AA+following the debt ceiling saga and the increase in the deficit which should continue to weigh on the country’s debt level.
If the causes were known, economists were nonetheless surprised by this decision, the first in more than a decade, when US sovereign bonds are the ultimate safe-haven asset for investors. After having swept the news out of hand, the latter finally pushed US long-term yields higher at the end of last week, movement that continued to grow this Monday.
But apart from the implications of this announcement for the markets, Fitch’s indictment also sounds like a disclaimer for other countries facing similar challenges, and who might, in turn, see their rating downgraded. There Belgium in particular is experiencing budgetary and governance phenomena similar to those observed in the United States.
At the center of Fitch’s concerns is the limited ability to deal with certain problems due to the fragmentation of the country’s political landscape.
The warning from last March
At present, our country enjoysAa3 credit rating from Moody’s, fourth highest and considered to be “of high quality”. For its part, S&P Global gives it an AA rating, the third highest on its scale. Fitch, meanwhile, gives the rating AA-, a notch lower. The ratings of the three major international rating agencies for Belgium have not changed since December 2016.
However, on March 10, Fitch made the decision to revise the outlook for the Belgian rating from “stable” to “negative”. At the center of the concerns, we then found “the persistence of large budget deficits” as well as “the upward trend in the debt”, but also and above all “the limited capacity to face these problems” because of the fragmentation of the political landscape from the country.
On September 1, the agency will publish the update of his rating for Belgium. Among the factors likely to lead to deterioration: a inability to reduce budget deficits which would lead to a continued increase in medium-term debt and a deterioration of the country’s competitiveness due to wage indexation, which would weigh on growth.
“No positive development to expect”
According to Benard Keppenne, chief economist at CBC, the agencies should not act immediately, however. “Fitch will likely await the outcome of next year’s election, and give Belgium the benefit of the doubt as to the rapid formation of a government. But if these discussions drag on, the agency might act.” As for the negative outlook assigned last March, “it will be maintained, there, there is no positive evolution to expect“.
Indeed, even if the agreement on budgetary control reached in March and the pension reform are positive elements, they would not be not enough to change Fitch’s opinion. “In terms of pensions, it’s really a marginal reform, which will have no significant budgetary impact in future years”, underlines Bernard Keppenne.
“I think Fitch’s quote regarding the erosion of governance applies totally to Belgium.”
“I think that Fitch’s quote on the erosion of governance fully applies to Belgium“, believes the economist. Although the American and Belgian systems are not comparable, “we realize more and more that in the face of budgetary challenges, but also climatic, governments are not up to the job at allWitness, for example, the endless discussions on the debt ceiling in the United States and those on tax reform in Belgium, marked by the impossibility of arriving at structural measures.
“The sense of urgency is no longer there”
In addition, the question of the growing burden of debt applies in both cases, underlines Bernard Keppenne. “As the European Central Bank remains in a firm position, there will be no cut in short-term rates. So over the year 2023, and probably until mid-2024, the additional cost for Belgium will be extremely high.“In addition, the Belgian 10-year rate
is currently approaching its record in eleven years of 3,36% reached at the beginning of March.
Since the government “has not taken any measures to reduce its deficit”, it will suffer even more from the increase in financing costs. In the first half of 2023, the rise in rates had represented an additional cost of 9 billion eurosaccording to the calculations of L’Echo, compared to the year 2022, which had already seen an additional cost of 10 billion compared to 2021.
Unfortunately, observes Bernard Keppenne, “the sense of urgency is no longer there, since we know very well that we are already in a position to prepare for the elections“. As for the criticisms leveled at rating agencies, the economist believes rather than “Fitch fully plays its role and warns on essential points that must absolutely be followed”.
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