Belgian interest is rising again, after desperate attempt Elio di Rupo for cabinet formation fails.

Belgium is the holder of an embarrassing world record, according to the Guinnes book of records. It hosts the longest cabinet formation in the world:528 days and counting.

Yesterday, a desperate and seemingly successful attempt of Wallonic representative Elio di Rupo failed on irreconcilable differences between the six parties involved in the negotiation process. Especially the demands of the liberal party VLD for more austerity and reforms instead of tax raises, collided with other parties´ demands.

The bond markets reacted like it could be expected: the interest on Belgian sovereign bonds soared. Het Financieele Dagblad (www.fd.nl) writes on this story:

Belgian interest is soaring (link in Dutch)

The Belgian interest was soaring today, after yesterday´s news that the Belgian 528-day cabinet formation suffered from yet another delay. A second story was that the Belgian government showed poor judgment in the rescue attempt of Dexia bank.

Man in charge of forming a new government and designated Prime Minister Elio di Rupo offered his resignation to Belgian King Albert II, thus further reducing the chance for a new, full-fledged Belgian government.

Besided that, the Flemish newspaper De Standaard (www.standaard.be) reported that Belgium negotiated poorly with the French government on the rescue attempt for Dexia bank. This cost the country dozens of billions of Euro´s in new guarantees.

Therefore investors demanded higher interest on Belgian state-debt. On 2y bonds, the interest rose by 20 basis points to 4%, compared to 0.7% in The Netherlands and only 0.4% in Germany. The 10y bond interest jumped with 23 basis points to 5%, widening the spread with 10y Bunds to almost 3%.

The friendly and beautiful country Belgium is steadily turning into a political dead horse; you can pull as hard as you want, but it´s not going to move. Even Steven Spielberg could not think of a scenario, where the Belgians would get a strong and decisive government that could put aside old conflicts and guide the divided country into the 21st century.

The current caretaker government of PM Yves Leterme does an adequate job at home and abroad and the state debt and budget deficit of Belgium are by no means outliers, compared to Spain, Italy and especially Greece.

But the desperate political situation in Belgium and the intrinsic indecisiveness of a caretaker-government are killing on the current angst-laden financial markets.

And the rescue of Dexia proves once more (after the Fortis/ABN AMRO melodrama) that governments should by all means avoid involvement in rescue attempts of system banks, as the will ‘to do the right thing’ clouds their financial and economic judgment.

It is not the task of a government to save the share- and bondholders of a financially doomed system bank like Dexia, by supplying guarantees for everybody and their sister; it is only a government´s task to maintain the strategic, risk-avert, daily business of saving and lending for such a bank. This is the part that can´t be missed in a system bank. 

Save the wheat, but don´t forget to get rid of the chaff.

The Belgian government failed to do so and now they are punished for it with an interest on 10y bonds that is approaching the danger zone.