Bloomberg News

Belgium at ‘Turning Point’ as Di Rupo Fights to Trim Deficit

January 16, 2012

(See EXT4 for more on Europe’s debt crisis.)

Jan. 16 (Bloomberg) -- Belgium, saddled with Europe’s fifth-highest debt, is at a “turning point,” Prime Minister Elio Di Rupo said as he struggles against faltering growth to meet a European Union budget-deficit target.

Di Rupo won a reprieve from speeded-up EU deficit sanctions on Jan. 11 after freezing 1.3 billion euros ($1.6 billion) of spending before a budget review next month. He has pledged to cut the deficit to less than 3 percent of gross domestic product this year, as required by the EU.

The six-party coalition led by Di Rupo in November unveiled a 2012 budget based on a growth forecast of 0.8 percent that contained 11.3 billion euros of spending cuts and tax increases to pare the deficit to 2.8 percent of GDP. Since then, Budget Minister Olivier Chastel has said growth will slow to between zero and 0.5 percent, forcing Di Rupo to cut even deeper.

“Today we all know that there will be deterioration in the euro zone and we’ll have to take additional steps,” Di Rupo said in an interview published in Brussels-based newspaper Le Soir on Jan. 14.

If growth stagnates, the government will have to come up with 1.36 billion euros of further savings to meet its goal, according to Le Soir. Belgium’s Economic and Social Research Institute, or Ires, forecasts a 0.3 percent contraction.

Bond Auction

Di Rupo was bolstered when Standard & Poor’s on Jan. 13 affirmed the country’s AA long-term credit rating, even as the company downgraded nine euro-area nations. S&P assigned Belgium a negative outlook, indicating at least a one-in-three chance that the rating will be cut in 2012 or 2013. Finance Minister Steven Vanackere called the decision “good news.”

S&P’s decision may help to restrain borrowing costs. A Jan. 13 auction already provided grounds for optimism, as Belgium sold 300 million euros of March 2035 bonds at a weighted average yield of 4.33 percent, compared with 5.774 percent in the previous sale of similar-maturity debt on Nov. 28. Investors also bought 100 million euros of March 2028 bonds at an average yield of 4.232 percent, down from 4.511 percent last February.

Such encouraging signs have been tempered by reduced growth estimates and the news that Belgium’s 2011 budget deficit was 4 percent of GDP, exceeding estimates of 3.6 percent by the prior government and the European Commission.

As a result, Di Rupo will have to deepen cuts before the budget review, which is scheduled for Feb. 25, according to the L’Echo newspaper. The Federal Planning Bureau will issue its latest growth forecast on Feb. 10, the paper said Jan. 14. Di Rupo said the extent of additional savings he’ll have to come up with will become clear after the bureau’s report.

Budget minister Chastel said the government should be aware of the risks of implementing austerity measures that hurt growth, according to L’Echo.

“We should keep that in mind and, perhaps, consider complementing budget consolidation with other steps to promote economic revival,” he told the paper. “We must be careful not to break the circle of trust.”

--Editors: Dan Weeks, Alex Devine.

To contact the reporter on this story: Patrick Henry in Brussels at phenry8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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