A TALE OF TWO CRISES: SENIOR BELGIAN FINANCE

C O N F I D E N T I A L SECTION 01 OF 02 BRUSSELS 001634

SIPDIS

E.O. 12958: DECL: 10/17/2028
TAGS: EFIN ECON PGOV BE
SUBJECT: A TALE OF TWO CRISES: SENIOR BELGIAN FINANCE
MINISTRY OFFICIAL ON THE FINANCIAL CRISIS AND BELGIUM'S
ON-GOING POLITICAL CRISIS

Classified By: POL/E Counselor Richard Eason


1. (C) SUMMARY: At one point in the middle of the
on-going crisis in Belgium's banking sector, according to a
top Finance Ministry official, Belgium narrowly avoided a
bank run. The financial crisis is already being used by the
francophone socialists against the francophone liberals who
control the finance ministry, despite both being in the
ruling government coalition. The financial crisis, which
hits the wallets of every Belgian, has pushed the stalemated
institutional talks far off center stage. The crisis is also
wreaking havoc with the government's budgeting process, with
deficits now being unavoidable for both 2008 and 2009. END
SUMMARY.

AND THEN THERE WAS ONE...
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2. (C) Olivier Henin, top aide to Belgium's Finance
Minister, told visiting EUR/WE Deputy Director and emboffs on
October 17 that the financial crisis in Belgium has pushed
all other issues off center stage. The months-long debates
on institutional reforms have been shelved for now. The
financial crisis is hitting every Belgian's savings and the
continuing rescues of the country's two top banks are
riveting everyone's attentions. Henin said that Fortis, the
first bank to need rescue, had been the bank of the
establishment. Its collapse and dismemberment was a trauma
to many Belgians. For years, Fortis had been seen as
Belgium's bluechip investment. Families passed down their
shares from generation to generation as a nest egg. Henin
asserted that the savings were safe but that shareholders
could not expect the government to do anything about the
collapse in the share prices.


3. (C) Henin attributed Fortis' failure to three factors:
poor management, the systemic collapse in market confidence,
and the purchase of ABN AMRO last fall when markets were at
their peak. When share prices fell and credit dried up,
Fortis could no longer finalize the deal and begin to try to
build synergies with the parts of ABN AMRO it had acquired.


4. (C) Belgium had narrowly avoided a bank run (a clear
reference to Fortis),Henin said. During the weekend, when
the Finance Ministry was working out a rescue package with
the Fortis partners, Ministry officials even feared an
internet run on the bank through its pc banking services.
Fortunately, the run did not happen. But the government had
to turn its attention immediately to Dexia, Belgium's second
largest bank. (NOTE: Belgium's third largest bank, KBC,
though under pressure for a time due to unfortunate remarks
by the governor of Belgium's Central Bank, has less exposure
to subprime loans and is stable. END NOTE.).

SO MUCH FOR THE BALANCED BUDGET
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5. (C) The uncertainty generated by the financial crisis
has led to estimates of Belgium's growth for 2009 that range
from 0.2% to 1.2%. If the growth rate ends up closer to the
lower end of the range, significant budget deficits will
result. The budgets for 2008 and 2009 are also reliant on
significant transfers (500 million euros) from the regions
(largely Flanders) and a 250 million transfer from the energy
sector in exchange for (perhaps) extending the phase-out of
the country's nuclear power plants from 2015 to some
unspecified later date. Neither of these options are
guaranteed to play out.

HITTING THE REAL ECONOMY
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6. (C) Henin said the Finance Ministry was receiving many
letters of complaint from people lamenting their inability to
obtain credit. Henin said that the banks would be unable to
lend to anyone unable to qualify and that the banking system
had no choice but to return to fundamentals of risk analysis
for lenders.

FROM BRUSSELS TO LUXEMBOURG TO REKYAVIK
--------------


7. (C) Like thousands of British investors, there were
Belgians caught up in the collapse of Iceland's banking
system. According to Henin, there were 20,000 Belgian
account holders with money in the Luxembourg branch of an
Icelandic bank.

WAITING FOR FLEMISH "POLITICAL RESPONSIBILITY"
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8. (C) Turning to politics, Henin referred to the break-up
of the Belgian nationalist party years ago to political
sub-prime debt. Those who left that party went to many
different Belgian parties, including the NVA, and its is many
of those voices who are now driving the debate on
institutional reforms. Reflecting his francophone
constituency (Liberals or MR),Henin said that the
francophone parties are still waiting for a demonstration of
"political responsibility" by Flanders with regard to serious
treatment of institutional reform. According to Henin, for
the francophone parties, everything connected with
institutional reform is on the table.


9. (C) However, for the moment, managing the country's
financial crisis is taking center stage. The francophone
socialists (PS) are using the crisis to play on the fears of
citizens, as an attempt to strength its intense competition
with MR in Wallonia (with regional elections looming next
June). Henin is not sure the whether the PS tactics will
work and he fears that MR could fall back to its considerably
lower vote totals of 2004, benefiting PS instead.

COMMENT
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10. (C) Few Belgians supported their political elite in
their squabbling over political issues over the past year.
Now everyone's attention is riveted on the country's banking
and financial crisis. Banks that even older Belgians had
grown up with are now gone or changed irrecognizably. KBC is
the only remaining large Belgian-owned bank. Many Belgians
own shares in these banks and have seen the values of their
portfolios plummet. After months of continuing revelations
of further write-downs and the need for new capital
injections, there is little confidence left in the country's
financial sector and it will take a very long time to restore
it.


11. (C) In the meantime, the crisis could well give a
significant push to the socialists in Belgium, particularly
in Wallonia. Didier Reynders, head of the francophone
liberal MR party, has been Finance Minister for nine years.
In the 2007 federal elections, his party benefited from
well-publicized corruption scandals involving the PS in
Wallonia. Barring some new scandal, MR will find itself in a
tough battle with PS in the June 2008 regional elections ..







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