Dexia bailout forces Moody’s downgrade of Belgian regional debt

Yesterday Moody’s placed a number of Belgian regional sub-sovereign entities on review for downgrade. The principal reason behind the move was the Dexia bailout. Moody’s explained that the uncertainty related to Belgian regions’ exposure to contingent liabilities from the Dexia bailout in the context of a worsening sovereign credit profile made the downgrade to credit watch negative necessary.

The Belgian government’s argument is that Dexia is well-capitalised and simply illiquid. Fine, that may be true, but we heard these arguments in Ireland too.

The word on the street regarding the Sarkozy-Merkel recapitalisation talks is that the French and the Germans are not in agreement. This is why they have failed to issue a bank recapitalisation plan. The French are reported to need and want some sort of backstop for their banks. After all, Société Générale, Crédit Agricole and BNP Paribas are the three banks that have had the most heralded difficulties in the wholesale lending markets.

The Germans do not want to sully their own credit rating by backstopping French banks when they know they need more capital for their own. But, obviously the French banks (and Dexia) are the ones where we have seen the European Bank Run most spectacularly right now.

These governments have to know that these bailouts are going to affect their credit ratings. They need to steer clear of worsening that credit profile in a panic environment. The only way they can do so is by clipping bondholders instead of taxpayers. The same dynamics for the European banking crisis are at play as with the sovereigns.

If I had to simplify the sovereign debt crisis to one sentence I would say this: As some euro zone sovereign debtors are near insolvency, a liquidity crisis has begun in which various ‘creditors’, the various national taxpayers and bondholders, must fight to determine how to apportion the losses.

This is not a zero sum game, however, because the magnitude of the losses also depends on how various actors play their hands. For example, austerity decreases output and increases the likely losses. A unilateral default followed by panic and contagion would do so as well. The players know this and are trying to play their hand in order to maximize their own narrow interests.

The political economy of the European sovereign debt crisis

The full text of the Belgian downgrade is below.


Moody’s Investors Service has today placed on review for downgrade the long-term ratings of three Belgian regions and communities as well as three of their government-related issuers.

Today’s rating announcement was prompted by:

(i) Moody’s decision to place Belgium’s Aa1 sovereign bond ratings on review for downgrade on 7 October 2011;

(ii) The need to assess the regions’ fiscal consolidation plans, particularly given the recent agreement on the political and institutional framework in Belgium; and

(iii) Uncertainty related to Belgian regions’ exposure to direct losses or further contingent liabilities as a result of the planned restructuring of Dexia Group.

The following ratings were placed on review for downgrade. In each case, short-term ratings were affirmed at P-1 (except Fiwapac which has no short-term rating):

Regional governments:

Aaa debt rating of the Community of Flanders

Aa1 long-term issuer and debt ratings of the Communaute Francaise de Belgique

Aa2 debt rating of the Walloon region

Government-related issuers:

Aaa long-term issuer and debt ratings of Aquafin NV

Aa2 long-term issuer rating of Societe Publique de Gestion de l’Eau

Aa2 backed senior unsecured rating of Fiwapac



The review follows the placement of the Belgium’s sovereign rating on review for downgrade Moodys places Belgium’s Aa1 ratings on review for possible downgrade, reflecting the strong fiscal linkages between sub-sovereign entities in Belgium and the national government. Sub-sovereigns are significantly reliant on the national government for revenue, with fiscal transfers accounting for 80%, 65% and 95% of 2010 revenue for the Community of Flanders, the Walloon region and the French Community, respectively.

Moody’s review will assess the regional governments’ vulnerability to the medium-term economic pressures which were one of the drivers for the sovereign rating announcement. In addition, the review will assess the effect of the recent agreement on changes to the political and institutional framework in Belgium on regions’ fiscal adjustment capacity. Specifically, this relates to the impact of the transfer of federal responsibilities (around EUR17 billion) on regional finances and particularly the extent to which these additional responsibilities will be matched with effective revenue sources in the context of fiscal consolidation measures.

Finally, Moody’s considers the plans to dismantle the Dexia Group to be credit negative for Belgian sub-sovereigns. We will use the review to assess (i) the extent to which the Belgian authorities’ evolving plans are likely to require the regions to incur direct losses or further contingent liabilities; and (ii) the implications for their ability to achieve their fiscal consolidation objectives.


Flanders’s debt metrics deteriorated substantially following the region’s and the federal government’s decision to recapitalise KBC Group NV (A3 stable) in 2009 (EUR3.5 billion each). Since then, the Flemish region has taken decisive steps to tackle its deficit problems, including the suppression of tax exemptions as well as the implementation of drastic cost-cutting measures. The review will permit a thorough assessment of the region’s capacity to withstand deteriorating systemic credit conditions and its ability to achieve fiscal consolidation targets in the current economic context, which is critical in it maintaining a credit rating one-notch above that of the sovereign.


Communaute Francaise de Belgique (CFB) is characterised by its exceptionally high reliance on transfers from the federal government, which have represented on average over 95% of its operating revenue. CFB has a solid track record of complying with the deficit limits agreed to with the federal government. This supports CFB’s estimate that it will report a balanced budget position no later than 2015. However, the placement on review for downgrade reflects Moody’s view that the community, whose rating is on par with that of the sovereign, does not have the required fiscal maneuverability to maintain a rating above that of the sovereign.


The substantial deterioration in the Walloon Region’s financial performance in the last few years has led to record-high debt metrics, with direct debt at around 88% of its operating revenue, and more than 190% when including indirect debt. Although Moody’s had considered the region to be on track to absorb its financing deficit in the next few years, this will need to be reassessed in the context of Dexia’s restructuring and the setup of a new financing system for regional governments.


The review for possible downgrade of Aquafin NV, Societe Publique de Gestion de l’Eau and Fiwapac reflects their strong links with their sponsoring governments, namely, the regions of Flanders and Walloon.


The strong credit links between the two water companies and their regions (Flemish and Walloon, respectively) ensure strict regulatory control over the companies’ activities through the approval of multi-year financial plans and the tight monitoring of the implementation of their investment programmes. The management agreements also provide secured funding mechanisms under which the entities bear limited commercial and operating risks. Finally, both companies’ ratings incorporate a high degree of support, which reflects their strategic importance within the regions. As a result, the review of their ratings reflects a similar rating action on their respective regions.


Fiwapac, a public interest limited liability company under Belgian Law, was used by the Walloon Region for the purpose of financing, together with other governments, the recapitalisation of two financial institutions (Dexia SA and Ethias Finance). Fiwapac acts solely as a vehicle to reimburse the debt incurred to finance the capital injections into these financial institutions. The debt rating is based on the Walloon Region’s explicit, first-demand, unconditional and irrevocable guarantee on Fiwapac’s debt. As a result, the review of its ratings reflects a similar rating action on the region.


Moody’s will monitor the conclusion of the review at the sovereign level and potentially also the reasons for a downgrade, should it materialise at the end of the review. As a result, the ratings of Belgian sub-sovereign entities are likely to mirror any changes at the sovereign level. In addition, Moody’s will analyse the institutional reform currently being implemented at the federal and regional level to assess the compensation mechanisms between both levels of governments. Moody’s review will also consider the details of the resolution of the dismantling of the Dexia Group and its potential consequences for sub-sovereign issuers in Belgium.


The methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, The Application of Joint Default Analysis to Regional and Local Governments published in December 2008, and Government-Related Issuers: Methodology update published in July 2010. Please see the Credit Policy page on for a copy of these methodologies.


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 ratings tab on the issuer/entity page for the respective issuer on

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Moody’s Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS’s EU credit rating agencies" on the ratings disclosure page on our website for further information.

Please see Moody’s Rating Symbols and Definitions on the Rating Process page on for further information on the meaning of each rating category and the definition of default and recovery.

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1 Comment
  1. David Lazarus says

    I was always concerned about Belgium because its banks had oversized lending compared to the size of the country. Just like Ireland. The bailout of Dexia has now set Belgium on the path to default. Whether it will escape is another matter.

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