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Bonds: Belgium looms as next debt victim

Date: Thursday 24 Nov 2011

Bonds: Belgium looms as next debt victim

Hello, anyone there?

Readers of this column ought, by rights, be trembling under their kitchen tables waiting for the euro debt crisis to destroy the western world. Yet, every evening from Sharecast towers, I see happy people, walking contentedly in the street, seemingly ignorant of 10-year Belgian bond yields.

If they but knew Belgium 10-year debt was today yielding 5.74% they would be busying themselves buying cans of tomato soup and making polite enquiries in the wholesale candle market.

Today, benchmark Belgian bonds climbed 25.6 basis points or 0.256 percentage points; this follows a climb of 40 basis points yesterday. These rises are happening because Belgium hasn’t had a government for 529 days.

The French speaking and Dutch speaking communities simply cannot agree on a power sharing formula. The arguments between them are too complicated to go into here but the lack of a government also means the country cannot agree a budget for 2012, nor the budget cuts that are necessary for it to remain credible to international lenders. It is worth noting that Belgium’s national debt is expected to be 97.2% of gross domestic product (GDP) by the end of this year.

Of course Belgium, on its own, is not a direct threat to western civilization. However, as another part of the threateningly large giant Jenga puzzle of European Union debt obligations, its failure may very well be terminal to the euro currency.

Let us, for masochistic reasons, cast our eyes across the piece. French 10-year bonds were yielding 3.72% at 4.58pm, up 3.2 basis points on the day; equivalent Italian notes were well into basket case territory at 7.02%, up 15.4 basis points on the day, and even German 10 year bunds had risen 4.7 basis points to 2.19%. This follows the disastrous auction yesterday of German debt which was 35% under-subscribed. In comments reported by Bloomberg today Sergio Ermotti, the Chief Executive of the Swiss financial giant UBS, said he didn’t consider any euro bonds as free from risk.

This comment cuts to the heart of the matter.

The fundamentals of individual economies have stopped mattering. It is the smell of death that lingers over the whole euro area that is making investors reluctant to lend money. As an example figures from the French government appear to show Japanese financiers are selling euro area bonds and buying large quantities of UK gilts instead. That hasn’t, however, stopped 10 year UK notes rising 1.7 basis points to 2.16% this afternoon.

It should be noted that Spain, which together with Italy is considered one of the main danger countries, did actually see a fall in its yield today, down a heartening 21.6 basis points to 6.63%.

This will only be a temporary respite, however, if the countries which share the euro cannot agree some kind of solution to the crisis. Much has been made of a so called “euro bond” (or "stability bonds" as they are now calling them, having belatedly realised that the term "eurobond" has been in popular use for decades now in corporate bon circles) where euro area countries club together to borrow money so that Germany, in effect, lends its AAA rating to its currently enfeebled partners. In a meeting in Strasbourg today, though, the German Chancellor Angela Merkel maintained this was still unacceptable to Germany; “Nothing has changed in my position” she told reporters.

There was some minor good news from Germany, as the well respected IFO index of business confidence increased to 106.6 this month versus 106.4 last month. Given the circumstances this is encouraging news but the crisis begins and ends with debt. Unless a mechanism is found to make lenders comfortable lending to Europe again the continent will fall into a financial cataclysm.

BS

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