Belgium’s public debt: Is the country losing market confidence?
3 min
Not a day goes by in Belgium without the issue of public finances being raised. The budget conclave is approaching, and debates are heating up: spending cuts, but where? Tax hikes, but which ones?
Everyone knows the crux of the problem lies in the long-standing mismanagement of public finances. A household or business managing its budget this way would quickly find itself in trouble.
Let’s look to the past to see if Belgium has ever faced such a worrying budgetary situation before.
The 1990s and the Maastricht Criteria
Many of us still remember the 1990s and the debates surrounding the single currency. To qualify, countries had to meet a strict set of requirements, the so-called Maastricht Criteria, including keeping public finances under control. At the time, it was agreed that the budget deficit should not exceed 3% of GDP and that public debt should ‘converge sufficiently quickly’ towards 60% of GDP. That last criterion now seems utterly unrealistic, but every era has its own standards and aspirations.
Still, Belgium, determined to join the single currency project, managed to slash its public debt-to-GDP ratio from 140% to 90% in just a few years. This is a remarkable feat that still makes one wonder. We know that some creative accounting was involved, like selling off ‘family jewels’ and tweaking the numbers. But the result was there, and that’s what mattered. The markets bought it, and Belgium secured its place in the single currency from the very start. Phew!
The clearest proof of this confidence lies in the spread between 10-year Belgian and German bond yields. This gap narrowed from 133 basis points in 1993 (meaning Belgium paid 1.3% more than Germany to borrow over 10 years) to -24 basis points by August 1997. It even remained below 20 basis points until just before the 2008 financial crisis. Trust was truly there!
Since the 2008 financial crisis and COVID-19, governments worldwide have ramped up spending while revenues failed to keep pace. Belgium was no exception, bringing us to where we stand today: debt is heading straight toward 110% of GDP, and the deficit exceeds 5% of GDP. Markets are once again turning their spotlight on Belgium and its poor figures.
The spread with German rates
The gap between Belgian and German rates began climbing again in 2008, even peaking at 363 basis points during the height of the European sovereign debt crisis in November 2011. It wasn’t until 2015 that it fell back to around 50 basis points - a level that still holds today.
The moral of the story
When there’s a will to reduce debt and deficits, it can be done.
The other lesson? Confidence in Belgium’s debt management is no longer what it was in the 1990s. That said, given the current spread, we’re not yet in crisis territory. However, volatility has undeniably increased, and bad news now travels at the speed of social media. We can’t play with fire: today, 60% of Belgian debt is held by foreign investors who could offload their assets at the first sign of doubt. After all, 10-year yields are nearing 4%, while GDP growth remains stubbornly weak. The question of debt sustainability is looming large!