Belgium saw its credit rating cut Friday by two notches, as Moody's said that the debt crisis in the euro zone was increasing risk for all countries carrying a heavy public debt burden. Gloom over the action carried over into Monday morning trading, when Belgian bonds underperformed as a result of the downgrade.
Reuters reported that Belgium's local- and foreign-currency government bond ratings fell to Aa3 from Aa1. Even the new rating has a negative outlook, meaning that another downgrade is possible within a couple of years. The ratings agency said that prospects for Belgium's economic growth and its banking system, especially thanks to contingent liabilities coming from its bailout of the Dexia group, also factored into its action.
In a statement, Moody's said, "The fragility of the sovereign debt markets (in the euro zone) is increasingly entrenched and unlikely to be reversed in the near future. It translates into heightened potential for funding stress for euro area countries with high public debt burdens and refinancing needs like Belgium."
Belgium had formed a new government on December 5 consisting of a coalition of six parties, after its former caretaker administration agreed on an austerity budget at the end of November. However, economists believe that that budget may be too optimistic, based on unrealistic growth estimates, and additional measures must be taken; that will be hard to push through the new government, since it must also satisfy demands of the Dutch-speaking Flemish majority for devolution of further powers to Belgium's regions.
Moody's sovereign credit analyst Alexander Kockerbeck said in the report, "The recent experience in Belgium is that the political bargaining process can be very challenging and it could be that the new government may need to agree on additional measures. It is challenging certainly for the government to come up with additional measures given the downward revisions of economic growth that we experienced in the euro zone as a whole."