Frankfurt am Main, October 07, 2011 — Moody’s Investors Service has today placed Belgium’s Aa1 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1.
The main drivers that prompted the rating review are:
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Belgium, as a result of the sustained fragility in the wholesale finance environment for euro sovereigns and banks stemming from the sovereign debt crisis.
(2) Risks of a deterioration of the public debt trajectory in light of increasing downside risks to economic growth.
(3) The uncertainty around the impact on the already pressured balance sheet of the government of additional bank support measures which are likely to be needed.
Moody’s review will evaluate the weight of these growing risks in light of the country’s high rating but also relative to the country’s strong credit features such as the economy’s net creditor status, high savings rate and the absence of substantial structural imbalances.
RATINGS RATIONALE
First, the fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for sovereigns and banks. Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite cannot be excluded. Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility is likely to remain and presents elements of vulnerability for euro area sovereigns with high public debt.
Second, the challenges facing the euro area banking system, the need for simultaneous fiscal tightening of euro area sovereigns, together with the weakening global economic growth outlook, pose risks to the growth outlook for the small and very open Belgian economy which, in turn, adds uncertainty regarding the stabilization and reversal of the public debt trajectory.
Third, given the fragility of the funding markets for sovereigns and banks, the likelihood for the need of additional government measures to support individual banks or the system has increased, as illustrated by the significant challenges now facing the Dexia Group. It is unclear how far additional support measures would be likely to weigh on the balance sheet of the government.
FOCUS OF RATINGS REVIEW
Moody’s review of Belgium’s sovereign ratings will focus on the vulnerabilities of the Belgian public debt in the current euro area sovereign and bank funding environment. This will include a review of potential additional need for government measures to support the banking system, or individual banks. In this regard, Moody’s intends to assess the potential costs and additional contingent liabilities that the government may incur in supporting the Dexia Group. During the review period Moody’s will also assess how the risks for the growth outlook of the Belgian economy and the government’s medium term fiscal and economic plans may impact the country’s debt trajectory. Finally, we will also look into the prospects for political stability in Belgium and how the recent agreement on the evolution of the political framework will address the institutional weaknesses which would otherwise have weighed on the rating and allow the incoming government the scope needed to address the country’s economic and budgetary challenges.
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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Source: Moody’s Investor Service