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Belgian report Belgian report
by Euro Reporter
2011-10-17 09:43:00
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Hopes for 6-party coalition government

Belgium's prime minister-designate announced Thursday he will seek a six-party coalition to end a political impasse that has lasted nearly 500 days, a record for a country to go without a permanent government. Elio Di Rupo said he expects to form a government of Christian Democrats, Liberals and Socialists, each split into separate Dutch and French-speaking parties. Bickering along language lines has prevented the formation of a government since June, 13, 2010, elections. Di Rupo announced a vital breakthrough earlier this week with a constitutional reform deal to grant more self-rule to the Dutch and French-speaking regions. He said in a statement Thursday that his priority is drafting an austere 2012 budget before a full government can be announced.

Tough economic and financial measures are essential since the crisis gripping Europe is also closing in on Belgium. It caused the demise of the Dexia Belgium bank, which was nationalized at a cost of (EURO) 4 billion ($5.5 billion) early this week. On Thursday, steel giant ArcelorMittal announced the partial closure of an east Belgian plant and the layoffs of hundreds of workers. Di Rupo said it was "now urgent to form a government (and) tackle economic issues and draft a budget for 2012." Belgium has promised to cut its annual deficit to 2.8 percent of GDP, from well over 3 percent this year, requiring savings of at least (EURO) 7 billion ($9.6 billion). Di Rupo's government will likely be installed within a week. The six partners joined up with the Greens earlier to agree on constitutional reforms.

At the heart of the constitutional reforms lies a desire for more autonomy in Dutch-speaking Flanders, Belgium's economic powerhouse. A breakup of the country would be a nightmare scenario in French-speaking Wallonia. The reforms will shift revenue-raising powers from the central government to those of Flanders, Wallonia and Brussels, the officially bilingual but overwhelmingly Francophone capital. The regions will also get more self-rule, notably in child allowances, labour market policies, elder care _ and even in setting their own highway speed limits. The federal government will remain responsible for a few key areas such as foreign policy, justice, defence, social security and the national railways. Belgium has long been a flash point of linguistic strife. This helped the independence-minded New Flemish Alliance to become Belgium's biggest political party in the June, 2010, elections. Its goal _ an orderly breakup of Belgium _ galvanized eight other parties to agree on new constitutional reforms that keeps the country together. When he takes office, Di Rupo will be Belgium's first prime minister from Wallonia in 37 years.


Belgium nationalizes part of Dexia bank

The Belgian state will buy the national subsidiary of embattled bank Dexia for euro4 billion ($5.4 billion) and provide tens of billions of Euros in new guarantees as part of a wider bailout of the lender, the first victim of a new squeeze in European credit markets. The part-nationalization of Franco-Belgian Dexia, announced Monday, was triggered by other banks' increasing reluctance to lend to it due to its exposure to highly indebted eurozone states like Greece and Italy and to struggling municipalities in the United States.

Banks depend on loans to one another for a large part of their daily financing, but can quickly withhold them if they sense there is a danger that a counterpart might collapse and not repay the money. Such fears intensified last week, pushing Dexia, which had a larger dependence on such funding than many of its rivals, to need rescuing from the government.

Belgium's caretaker prime minister Yves Leterme said the nationalization was necessary to insulate the Belgian retail bank from the risks of the wider group, Dexia SA. He said support from the state ensures that all of Dexia's clients "can be sure and certain that their money is in full security." On top of the nationalization, the governments of Belgium, France and Luxembourg together will provide an additional euro90 billion ($121 billion) in funding guarantees for the bank for up to 10 years.


Moody's warns Belgium it risks credit rating cut

Moody's warned Belgium on Friday its credit rating could fall due to the burden of bailing out Dexia, the French-Belgian financial group, and the prospect of higher funding costs and weak economic growth. The ratings agency said it had placed Belgium's Aa1 government bond ratings, one notch below the top Aaa status, on review for possible downgrade. Moody's joins Standard & Poor's and Fitch, which have put their AA-plus ratings for Belgium's on negative outlook in the past year. Both said Belgium's lack of a fully fledged government undermined budget efforts in one of the euro zone's most indebted states.

Moody's cited three reasons for its review: materially increased funding costs for sovereigns and banks of countries with high debt, risks to growth of Belgium's open economy, and the weight on public finances of supporting the banking sector. Dexia is on the verge of being split up by Belgium and France, though a Dexia board meeting to discuss the group's future has been pushed back to Sunday from Saturday. Dexia, whose shares fell 42 percent this week alone, has been struck by both its heavy exposure to Greece and troubles accessing wholesale funding.

Belgium is to pay for the likely nationalization of Dexia's Belgian banking business and its share of guarantees for a "bad bank" of Dexia assets, including euro zone periphery debt. In the course of its near-term review of Belgium's rating, Moody's said it will include a close look at the potential for additional 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," Moody's said.

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