Belgian Debt Now Problematic

from FT.com:
Anxiety is mounting in financial markets that a prolonged bout of political uncertainty in Belgium following national elections next Sunday could prevent decisive action to tackle the nation's debt mountain that threatens to turn it into "the Greece of the north".

Interest rates on 10-year Belgian government bonds jumped from 3.15 to 3.50 per cent last week and investors are demanding a mounting premium to hold the debt over corresponding German paper.

Belgium's debt is currently at 99 per cent of its gross domestic product, the highest in the eurozone after Greece and Italy, and is forecast to exceed GDP by the end of the year.

Yet no political party is campaigning for an explicit belt-tightening mandate. Despite rising unemployment and sluggish growth, the economy has barely featured in the campaign.

"In other European countries you see cuts in public spending. In Belgium that is not happening, and it won't happen without a government," says Philippe Ledent, economist at ING in Brussels.

Moreover, the Belgian economy runs a trade surplus, which makes financing debt easier. Household debt is among the lowest in the eurozone. And Belgium has a solid track record of paying down high debt, Ms Leclercq points out.

However, Belgium's climb out of recession has been slow, with GDP rising by just 0.1 per cent in the first quarter, below the eurozone average. "If this trend continues, Belgium's fiscal consolidation plans may turn out to rely on overly optimistic growth projections," says Emilie Gay of Capital Economics. "There is no doubt that Belgium is the weak link of the north," she wrote in a note last week.

The structure of its debt could add to its problems. Eighty two per cent of short-term paper is owned by foreigners. It has relatively short maturity - under six years - meaning Belgium must return regularly to tap the markets for fresh funds.