Morning all. A spot of short term cover for Yves, who will be back later today after a mini-epic, with the head of Medusa maybe.
In Euroland, Ireland (on which more later if I have time), Portugal (whose banks turned out to need still more funding help from the ECB in August) and Greece (where there is a continued run on bank deposits – they’ve now lost 11% of their deposit base since January, and one bank, National Bank of Greece, now has to raise new capital) are hogging the market’s attention, with CDS and 10-year spreads over German government bonds widening sharply.
In the mean time, the situation in my favourite Eurosleeper, Belgium just got a little more critical. Negotiations to form a new government, which have been dragging on since May, broke down last Friday. Not terribly surprising, and in fact pretty routine for Belgian politics, but what seems to be new is that for the Francophone Socialist Party, talk of the end of Belgium as a national entity is starting to be taken seriously. So far, secession has been the agenda of a minority: the now largest Flemish party, Nieuw-Vlaamse Alliantie. From Reuters:
Friday’s collapse of coalition negotiations, almost three months after a parliamentary election, caused senior French-speaking Socialist Laurette Onkelinx to warn that a divorce was now in sight.
“We must start preparing for the end of Belgium,” she told Sunday’s edition of La Derniere Heure newspaper.
Rudi Demotte, president of the French-speaking region of Wallonia, told Belgian radio that francophones should start to consider their options, including a future without Belgium.
Now, this could be the Socialists pushing back at their own base, or other parties, for more negotiating room, or even just (very high-risk) petulant grandstanding after four unproductive months at the negotiating table. It certainly seems to mean exactly what it says, though. Elucidation from locals is again most welcome (the comments were very useful last time – thanks to all).
At the moment, 10 year Belgian government bonds yield just 70bps more than Germans, so the market is discounting neither secession in Belgium, nor the continued failure to form a government capable of sorting out the Belgian budget. This impasse could drag on much longer (there is still only a caretaker government, and new mediators have been appointed to get negotiations for a new coalition back on track).
That is business as usual in Belgian politics, and, by itself, even in these febrile markets, may not cause any fireworks. But if it begins to be clear that the secessionist idea really is getting wider traction on both sides of Belgium’s ethnic divide, those bond spreads will start to go Greek-sized, and worse, and not inch by inch, either; and voila, we have a sharp crisis right at the centre of Europe, not the periphery.
So let us hope that Laurette Onkelinx, and others behind the scenes, no doubt, are knocking the right heads together; umm, if that’s how you promote intra-national harmony.
Thank you Germany. Another one:
“Thank you, Germany”
“The export is regaining some of the lost ground, and the Danish trade balance now shows a far bigger surplus than expected.
In July the surplus on the trade balance amounted to DKK 8 billion compared to DKK 4.8 billion the previous month.
According to Bloomberg the market had expected a surplus of DKK 4.5 billion.
New data from Statistics Denmark show that the surplus in the foreign trade is explained by the export increase of goods by 5.2 per cent, whereas the import of goods decreased 0.6 per cent compared to June.
However, seasonally adjusted figures excl. ships and aircraft show that over the last three months the import has increased more than the export, namely by 7.3 per cent against 5.7 per cent.
»The conclusion is thus that Danish export seems to profit by the recovery of the global economy, where especially the growth in Germany, our largest trade partner, contributes significantly,« chief economist Jes Asmussen at Handelsbanken wrote in a comment.”
“Portugal (whose banks suddenly need a lot more funding help from the ECB)”
Isnt that. The funding inst bad at all but capital ratios must to improve to meet the new standards requiered by Basele Comitee. Some banks will need to raise more capital from their stockholders what is very good.
Isnt the same to need funding from ECB.
Thanks PJM. I dug my heels in a bit more, since I couldn’t immediately see how the impact of an extra capital requirement from a new regulation would manifest itself in record sovereign yield spreads.
Why would I mind if Belgium split in the Flemish country and the Waloon countries? They may have excellent beer but they also killed 10 million Congolese at the end of the 19th and beginning of the 20th century and like the Austrian and the Turks never admitted responsibility.
As far as I am concerned, they can go back to be 1000 Fiefdoms.
All true. Have a look at the book “Leopold’s Ghost”. It will turn your stomach.
Bear in mind that Leopold II was a francophone, and francophones were in charge during the 19th and early 20th centuries.
Good to have you back Richard. I like the change in topics you bring to the site.
I cannot really add any “local knowledge” but I do have some Dutch friends who say there’s been more talk along the lines of “what if” Belgium was to split. They don’t think it will happen, but it seems like plenty of people in the Netherlands would be happy to welcome their neighbours if it did.
Most people in the Netherlands would love to unite with Flanders. This is unlikely to happen as most Flemish find the Dutch too arrogant. The Flemish erronously take the blunt directness of the Dutch as arrogance. Ironically, this trivial point seems to be decisive. A real pity.
If you people can come to the essence in one or two paragraphs, please do so. Unless, you have got something to say off course :-)
Before Friday’s breakdown of the negotiations, the Francophone Socialists were negotiating to form a government. As I understand it, the three big issues include a reduction in the 6 billion euros of “solidarity” funds transferred from the Flemish to the Walloons each year. Another point is the status of the suburbs of Brussels where francophonism is spreading into what are officially Flemish areas. The third point of discussion is the status and financial situation of Brussels, which is its own region. Apparently in Brussels, all the international institutions located here do not pay enough tax despite much money being poured in by means of the high salaries these functionaries being paid from outside sources. Combined with a growing third world population that, for one reason or another, has trouble integrating into the local economy, a large strain is being put on Brussels’ finances. I have run this all by my Belgian colleagues here this morning and they agree that these are “les grandes lignes” of the debate; but please let me know if any locals (or others) disagree.
Had the Socialists made huge concessions just to form a government, they would have been held up to ridicule and their treason would have created much anger among their supporters, etc. Think how you feel about Obama bailing out every Rentier parasite in sight. Besides, as Bismarck noted, a peace settlement is never sustainable if one side feels hard done by.
With their recent announcement of the end of Belgium, the Socialists have changed the whole nature of the discussions. They are no longer negotiating just to form a government, they are fighting to “save the union” of Belgium. Under these conditions, as Lincoln so well understood, compromises are possible and what would have seemed like a catastrophe turns into a victory. Once the Walloon people get their head around losing all 6 billion of those “solidarity” checks, they will consider it a victory if the Socialists are able to “save the union” by agreeing to cut 2 billion a year and a schedule to reduce these checks even further over a period of time. I have no idea how they will deal with the problem of francophone creap in the suburbs though.
On the status of Brussels, the funny thing is that many Walloons assume that Brussels would come along with them if Belgium did break up. On the other side, all the maps I have seen of Flanders show “Brussel” on it in the same colour as the Flemish parts. But do the people of Brussels really want to join the Walloons? Do they really want to become the new Flemish and start sending “solidarity” payments South. Certainly on the cultural level most of the people of Brussels have more in common with the Walloons but on an economic level they would be far better off joining the Flemish (as long as Brussels was allowed to stay officially bilingual). In the end, in case of a break-up of Belgium, the people of Brussels would probably vote to just be an independent city state a little like Washington DC.
I’ve been involved here in many similar negotiations (but on a much smaller scale where the stakes were obviously not as high) and my guess is that the Socialists calls for the break-up of Belgium is a very well played tactic that will ultimately help bring the negotiations to a close without the break-up of Belgium. The details on Brussels and its suburbs will be complicated however. In the end though, once a deal is concluded, the Walloons may even end up thinking that they got one over on the Flemish despite whatever concessions they will have to make; and the Flemish might even conclude that once again, those sneaky francophones wiggled out of a trap, despite whatever gains the Flemish obtain. As Bismarck would have said, these would be the exact conditions, the winner feeling slightly cheated and the loser feeling slightly lucky, for a lasting agreement.
As a Belgian, I can perhaps shed some more light on the core of the divisions that are currently standing in the way of a government coalition.
Since the sixties Belgium is evolving from a solid unified nation (very much like France) towards a federalist Union of regions (much more like the US). With each step the regions have been awarded more selfdetermination. Originally this was driven by Flemish resentment against a Francophone bourgeoisie occupying all the senior posts in society and its accompanying disdain for the Flemish culture. In the last few decades the apparent differences in economic development have been thrown into the mix.
Until the fifties the Walloon region was the economic heartland of the country, with its heavy industries and coalmines. It was similar to the Ruhr region in Germany. Slowly these industries began to decay up to the point that most of them were being closed. At the same time the Flemish region has entered into an economic expansion that now places it among the biggest economic powerhouses of the EU. Driving forces are its ports, (petro)chemical industry, pharmaceuticals and technology.
Back to the evolution of the state:
Currently the regions can independently determine how taxes are being spent for the majority of government expenditures (think: education, agriculture, wellfare,…) but the funding (i.e. taxing) remains largely under the authority of the central government. Obviously this requires for some form of distribution mechanism (how much does every governing entity get out of the central trough to fund its responsibilities).
In the early nineties, when the bulk of responsibilities was transferred to the regions, the francophone region found itself dramatically underfunded for the expenses they had agreed on. The flemish view was that their expenses were wasteful and the government was averse to much needed changes. The francophone view was that they had been shortchanged in the way funds were being distributed.
Whatever the truth may be, the francophone region had a couple of horrendous years in local government, with no money to determine any kind of policy and an education system that seemed to be on strike forever. Eventually this funding gap was used by the Flemish to transfer more responsibilities to the regions. In exchange the francophones got the money they thought they should have been entitled to.
Currently, the Flemish want even more responsibilities to be transferred to the regions (and the francophone parties seem to be willing to agree to that). The Francophone parties want a solution for a badly underfunded capital region (largely frenchspeaking). In the past, this would have been a done deal, the flemish get more selfdetermination and the regions (including the francophones) get more money out of the common pot.
But here’s the problem: the last reform scraped every penny possible out of the common pot. Not only is the common pot empty, the regional and central governments will need to agree how they will close a funding gap that runs between 15 and 25% of the total budget. There is no way an state reform can be ‘bankrolled’ at the moment. In essence the view of the Flemish is that the region that spends the money should be made responsible for funding it (or at the very least the common funds should be divided in such a way that whatever reforms are decided on the regional level should benefit the region, and not the common pot). The francophones, remembering this kind of talk from the early nineties, are afraid that any way that ‘objectifies’ the funds distribution will be just another tool to deny the francophone regions the money they need.
Once an agreement can be found on the funds, all the rest will be agreed upon in no time. Initially the parties talked about almost everything apart from the money. This was agreed between the two main parties who won the elections (N-VA in the north, PS in the south). I imagine they wanted to bring this to the table once every party had already been in the negotiations for so long that there would be enough trust and commitment to agree even on that difficult topic.
However, the money turned out to be the elephant in the room and no party seemed to be prepared to agree to anything. When it was finally put on the table there was no trust and no commitments. Pretty much the opposite of what was needed.
At the moment, we’re in calm down mode. The dust needs to settle before another round of negotiations can start.
Just one more observation: the author of the article suggests that once the financial world realises what a big mess belgian politics really is the bond yields will skyrocket. I don’t really agree with that. There is very little that isn’t functioning during this negotiations phase, so it isn’t like there is no one left to guard the store. Further, the most important factor in determining the spread over German Bunds is the willingness of Belgian (Flemish and francophone) citizens to pay back the creditors. There is absolutely no doubting that willingness. The national debt is huge, but it is not looked at like something that has been forced on us by anyone. It is more like an old friend, that has been around for a long long time.
“the author of the article suggests that once the financial world realises what a big mess belgian politics really is, the bond yields will skyrocket”
Well, that remark of mine is more about what might happen if this secession talk really gets going. If the messiness of Belgian politics was all it took, yields would have skyrocketed years ago!
I am no visionary of the bond markets. But as far as I understand, a bond holder wants to be left alone, holding his bond, enjoying the coupons. It is only when there is a perceived risk of default on that bond when the bond market wakes up and starts to make demands. As we have seen with Greece, these mood changes can be sudden and dramatic.
Still, we have to consider who is behind the bond market. In the end it will not be the traders that will be left holding the bag. They merely play on real sentiments regarding the creditworthiness of the debtor. So we must ask ourselves who stands to lose if Belgium would default on its obligations.
It may come as a surprise to you that the main creditor of Belgium are its citizens (much like Japan, even if the percentages are not as extreme). Belgians hold these bonds either directly (through their banks, who issue ‘kasbons’) or indirectly via their private pension funds.
So, to advocate a default on debt obligations would be a massive own-goal for any politician. And let’s not forget that a default is ALWAYS a political decision, not a financial one.
When mainstream media starts talking the Truth to american people?
Some interesting stuff that everyone must to read:
Hey, its only a small uncover of the big issue concerning special operations by the government of USA. I doubt that the Averrage Joe knows that kind of things. Things that corrupted all entire american financial system. When special operations works together with some special banks… S**t happens.
Just a thought, I know that the French are most studiously avoiding any comments on this ‘internal’ Belgian matter.
But I suspect that they would consider 6 billion euros per year small change to pay for the integration of the Walloons into the hexagon.
MarcVdB & Kevin de Bruxelles, both many thanks for your in depth background analysis. I’ve lived for 5 years in Belgium and these deep insights are very helpfull, even for people in and around Belgium but most for people living further away.
The splitting of Belgium is a very, very slow process, if it will ever happen. I doubt the benifits will be enough to actually do it.
Totally agree with your idee, but not sure about the 7 bp spread vs Bunds that you indicate. Markets are not THAT irrational unfortunately…
Ha, thank goodness I am not on the Bond Desk. Updated.
On the lighter side, this prompted me to look up a large art project by some Belgians at the 2006 Burning Man Festival:
They built an opulent/extravagant structure unofficially called “The Belgian Waffle” out of 1/4 million 2x4s
Which hosted a huge party for several days before it was deliberately burnt to the ground as part of the performance:
There’s an irony in there somewhere.
Thanks to Ireland and Belgium commenters, regular and not, for another helping of extra detail and thought.