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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.
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.
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.
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.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Source: Moody’s Investor Service
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
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