Due to the focus on Italy, Spain and the ongoing debt worries in the other Mediterranean Eurozone countries, Belgium has largely remained hidden underneath the radar. Despite pleas from King Albert II for the divided Flemish and Walloon regions to unite in order to deal with the country’s economic issues, they have been without a government for some 13 months. While a bit of laissez-faire would usually be a good thing for an economy, with Belgian debt at around 100 per cent of GDP, measures must be taken soon in order to keep the credit ratings agencies at bay. According to Chris Beauchamp, research analyst for the IG Group: “Standard & Poor’s warned six months ago that it would consider downgrading Belgian debt if politicians failed to form a stable government. Six months have now expired, and it would certainly be exquisite timing if S&P, or indeed any other ratings agency, choose this moment to downgrade its rating.” Beachamp adds: “Such a move would be highly problematic for the EU, since it would show that debt concerns go right to the heart of the European project.”
In common with its Eurozone brothers in arms, Belgium will need to overcome political and regional factions in order to push through the austerity measures required to convince the ratings agencies that they are serious about dealing with their financial woes.
As Beauchamp points out: “Recent events have shown that contagion can engulf nations very quickly, and both national and EU leaders could rapidly find that the situation has moved beyond their control if they don’t get their skates on.”
While Belgium is an economic minnow in the same shoal as Greece, the troubles affecting Italy are a very different kettle of fish.
According to Stephen Barber who advises Selftrade on markets and economics: “Rescue packages for Greece are still being discussed, but in the overall scheme of things, this is manageable.” He adds: “The threat comes from Spain or Italy, which while too big to fail are also too big to bail out. After all, core Europe and Britain are home to many of the banks most heavily exposed to the sovereign debt.”
While the facility exists to prop up the Greek economic disaster, it is unlikely that it would be possible to support Italy, which has the third biggest bond market in the world, second only to the United States and Japan.
“Italy is not just the third largest economy in the EU but more pertinently it has the largest bond market,” says Chris Towner, director of FX Advisory Services at HiFX. “The fear is rising that the Italians may in the future start to struggle with their enormous debt levels, which are approximately 100 per cent of their annual GDP.”
The attempts to bring the Italian economy under control are not helped by the perpetual cloud of controversy hanging over their bunga bunga party loving president, Silvio Berlusconi. This weekend, an Italian court found that Berlusconi had been accomplice to attempts to bribe a judge, but no charges could be brought, due to the lapse of the statute of limitations.
Much like Greece, the Italian population has shown a distinct lack of popular volition to implement austerity measures to bring the country’s deficit under control, with Finance Minister Giulio Tremonti’s proposed €40bn austerity package facing strong opposition.
Fears have grown that the Berlusconi government would be unable to force the programme through the two houses of Parliament, but the Italian premier has issued a plea for unity in order to prevent Italy heading down the same road as Greece and Portugal.
If Italy’s bond auction on Thursday flounders, then the bond vigilantes will be ready to pounce.
SWISS CURRENCY HAVEN
The Eurozone bond crisis has not caused any significant volatility in the highly liquid euro-dollar currency pairing. Instead, each piece of bad news has driven investor flight into safe havens, with the Swiss franc being the haven currency of choice. With the euro-Swiss franc pairing hitting new lows at the SFr1.600 level – a long way from its pre-2008 levels of SFr1.6800 – it is unlikely that we will see then end of this trend until the Eurozone finds some stability.