AMBASSADOR'S MEETING WITH BELGIAN FINANCE MINISTER

C O N F I D E N T I A L SECTION 01 OF 02 BRUSSELS 001702

SIPDIS

E.O. 12958: DECL: 11/06/2023
TAGS: ECON EFIN BE
SUBJECT: AMBASSADOR'S MEETING WITH BELGIAN FINANCE MINISTER
ON THE FINANCIAL CRISIS AND ITS IMPACT

Classified By: POL/ECON Counselor Richard Eason, Reasons 1.4 (b) and (d
).


1. (C) SUMMARY: Belgium's Finance Minister Didier Reynders
expects the EU's number one goal in the November 15 Finance
Summit to be to build collaborations between governments and
with the IMF over the coming weeks. The rescue of Fortis by
Belgium, the Netherlands and Luxembourg is an example of what
can be done with cross-European collaboration. Reynders
believes that the next challenge for governments will be to
rescue distressed companies with financial problems. He
expects 12-18 months of more economic instability and traces
the current crisis to the failure of Lehman Brothers. Rising
unemployment and the fall-out of the financial crisis will
become a key political issue in the run-up to the June 2009
regional elections, generating a debate on the merits of
liberalism versus socialism, particularly in Wallonia.
Regarding the financial crisis in Belgium, there are still
problems related to inter-bank financing and a resulting
depressed level of new business activity. Belgium continues
to be eager to see whether Dexia's U.S. monoline subsidiary,
FSA, will be covered by the Paulson Plan. END SUMMARY.

THE FINANCIAL CRISIS
--------------


2. (C) Finance Minister and Deputy Prime Minister Didier
Reynders met with the Ambassador on November 4 to discuss the
financial crisis and its impact on Belgium. Reynders noted
that he was in regular contact with officials of the U.S.
Treasury and the Federal Reserve Bank. These discussions
centered on the Paulson Plan and the crises affecting banks
and insurance companies in Europe. Belgium continues to have
significant exposure in Dexia through its U.S. monoline
subsidiary FSA. Belgium is working with the French, the Fed
and the U.S. Treasury to reach a solution but is being told
that the solution has to lie with the Treasury Department.
Reynders said he may seek the Embassy's good offices on the
issue at some point in order to find a solution with the U.S.
government.


3. (C) Reynders had just returned from a European Union
ECOFIN meeting and was meeting with the head of Belgian's
Banking Commission and a Director of Belgium's central bank
as the Ambassador arrived. Reynders said the ECOFIN meeting
was held to prepare for the November 15 G-20 meeting in the
U.S. The EU will want to discuss concrete cases like Dexia.
It will also want to discuss global collaboration on dealing
with the crisis and attempt to develop a central vision of
the future of the world's financial architecture with
concrete proposals. On Friday, November 7, French President
Sarkozy will chair a summit in Brussels to finalize the EU
position for the G-20 meeting. The first goal of the EU will
be to lay out a plan of collaboration between governments for
the coming weeks which will also lay out the role of the IMF.



4. (C) Reynders sees the resolution of the Fortis crisis as
an example of how an EU-wide collaboration would work in
responding to a bank failure, based on the fact that the
governments of the Netherlands, Belgium and Luxembourg had
coordinated on the solution. Reynders did not expect the EU
to establish a pool of capital for use in crises. He noted
that the support program for Hungary involved both the EU and
the IMF.


5. (C) According to Reynders, EU governments had injected
280 billion euros into banks across Europe in exchange for
shares and had established an additional 1.8 trillion euros
in government guarantees for refinancing. Dexia had drawn on
150 billion of these guarantees. The guarantees were valid
for periods ranging from three months to three years.


6. (C) Based on the European Commission's forecast of 0.1
percent growth for the eurozone, Reynders expects governments
will have to bail out companies as well, as the financial
crisis and credit crunch hits the real economy. This is
already happening in Belgium, despite improvements in the
liquidity picture.


7. (C) Reynders expects another 12-18 months before Europe
begins to work itself out of the crisis. He asserted that
the trigger for the crisis was clearly the failure of Lehman
Brothers. Letting Lehman Brothers fail, although he
understood for rationale for it, was "a mistake." It caused
a contagion of a lack of confidence which swept through the
financial system.

THE POLITICAL IMPACT
--------------

BRUSSELS 00001702 002 OF 002




8. (C) In looking forward to Belgium's regional elections
in June 2009, Reynders expects a vigorous debate in the
country on the merits of liberalism versus socialism. (NOTE:
Reynders heads the francophone liberal party and is in a
difficult campaign with the long-entrenched francophone
socialists for political influence, particularly in Wallonia.
END NOTE.) The expected low growth will inevitably fuel
higher unemployment. Although Belgium averages 7%
unemployment nationally, unemployment is far higher in
Wallonia and Brussels. Indeed, in the under 25 age cohort,
it can be 25% to 30%. Already the steel company Arcelor
Mittal is shutting a steel mill in Wallonia. Other companies
doing the same will only lead to more job losses,
particularly in Wallonia.


9. (C) The financial crisis has temporarily shelved the
political debates on institutional reform. However, Belgium
must still have a national discussion on autonomy for the
regions as a possible means of solve the unemployment
problems. The north of Belgium (Flanders) continues to have
problems finding jobs for older workers and the south
problems finding jobs for younger workers.

THE ECONOMIC IMPACT
--------------


10. (C) Thanks in part to support from the European Central
Bank as well as from the Belgian government, the liquidity
situation in Belgium is improving. However, there are still
problems with the cost and availability of financing between
banks. But the real problem is that little new business
activity is being generated. Liquidity is available in the
markets but is not being used. Money is injected into the
markets in the morning but twice the arm is turned in each
night. Many companies continue to be afraid to invest.
Banks are holding on to their cash and do not want to make
any investments with it. Just last week, the government in
Belgium agreed to provide funding to small and medium
enterprises, an attempt to compensate for the sharp drop in
demand for loans by SMEs.


11. (C) Regarding government debt, Reynders noted that
Belgium's debt/GDP ratio had reached 140% in 1993. It was
around 80% today. This helps give the government some
flexibility and the ratio could riser to 87% of GDP as a
result of the bank bail-outs.

DEXIA AND FSA
--------------


12. (C) The Belgians are working closely with the French and
the U.S. Treasury and the Fed on the package for Dexia. A
key challenge is the bank's exposure to its U.S. monoline
subsidiary, FSA. The Belgians are eager to learn whether FSA
will be covered by the Paulson plan.

COMMENT
--------------


13. (C) Reynders and staff at the Finance Ministry and
Central Bank are exhausted from their weeks of crafting
bail-outs or packages for Belgium's three main banks and in
trying to jump-start the credit markets. Analysts give the
government generally good marks, despite the radical
transformation suffered by the country's banking sector. The
issue for Reynders will be whether francophone voters will
blame him for the crisis, based on the fact that he has been
Finance Minister for nine years. The francophone socialists
will certainly try to use the crisis against him politically.
In a sense, the June regional elections will be a test on
how much views of an open economy with less involvement by
the state has become accepted by average Belgians, especially
those living in Wallonia, which has been ruled for decades by
the Socialist Party.

FOX
.