BELGOIM: FINANCIAL SECTOR SCENESETTER FOR CODEL SHELBY (AUGUST 28-30)

UNCLAS BRUSSELS 001164



SENSITIVE

SIPDIS



DEPARTMENT PASS TO SENATE BANKING COMMITTEE BILL DUHNKE

STATE FOR EEB/IFD, EUR/ERA AND EUR/WE

TREASURY FOR OASIA/OIN

USDOC FOR 3133/USFCS/OIO/EUR

E.O. 12958: N/A

TAGS: EFIN, ECON, BE

SUBJECT:BELGOIM: FINANCIAL SECTOR SCENESETTER FOR CODEL

SHELBY (AUGUST 28-30)



Introduction (SBU) Embassy Brussels(##)



Shelby to Brussels, Belgium is

occurring(##)Belgium (GOB) prepares to

additional August break to (##)a

budget that promises the country's export(##)KBC, the

second(##)thought the GOB

(##)Fortis to the French GOB still has

substantial exposure to all three



banks via capital injejtions and guarantees it has provided.

As a result of its interventions the government will facing a

significant uphill climb in the comin years to turn around

its public finances. Wile the GOB's finances are somewhat

grim, itsactions stabilized and improved Belgium's financial

sector, although at great cost to the gvernment and to many

shareholders in the banks who saw the value of their shares

fall. Your meeting with Foreign Minister Yves Leterme should

give you the opportunity to discuss the impact of the

financial crisis on Belgium's banking sector with one of the

key actors for the GOB during the crisis (Leterme was Prime

Minister at the time and was integrally involved in the GOB's

rescue efforts) as well as to discuss with him the GOB's

response and his views on the way forward. End introduction.



Three Largest Banks Hit Hard by Crisis

--------------



2. (SBU) Belgium's three largest banks, Fortis, Dexia and

KBC, all ran into problems as a result of the financial

crisis in the fall of 2008. Because all had balance sheets

greater than the country's GDP, they were seen as 'too big to

fail.' The GOB, and in some cases Belgium's regional

governments (Brussels, Flanders, Wallonia),gave the three

banks guarantees, loans, or capital injections. The

country's second largest insurance company, Ethias, also

required assistance in the fall of 2008 and received fresh

capital from the federal and regional governments. At the

height of the crisis, there was real fear that the banks

could go under. The GOB could not allow that to happen. As

the global economy and financial system has stabilized and

stock markets have rebounded in 2009, so have the stock

prices of Belgium's banks. Although still down substantially

from their pre-crisis highs, they are nonetheless well above

their low points and up significantly in 2009. However, the

system is still fragile at best. The overall capital

injections by federal and regional governments were costly,

at around 7 percent of GDP (24 billion Euros). The GOB and

the Flemish regional government (to KBC) also offered

billions of Euros in guarantees in an attempt to unfreeze

lending and build confidence in the sector.



Fortis Bank -- an Economic and Political Liability

-------------- --------------



3. (SBU) Foreign Minister Leterme was Prime Minister at the

height of Belgium's banking crisis in the fall of 2008. He

was forced to resign as Prime Minister in December as a

result of the perception that his government attempted to

sway a ruling by the country's Supreme Court involving the

sale of Fortis to BNP Paribas. A parliamentary commission

ultimately cleared Leterme of involvement, but not before he

and his Justice Minister resigned. An investigation into

"Fortisgate" continues in August 2009, now more focused on

whether elements of the judiciary acted improperly. No one

seems to expect to find a 'smoking gun' involving Leterme.

During the crisis, Leterme and his Finance Minister Didier

Reynders worked extremely hard to broker the deals that kept

all three banks afloat. Following Leterme's resignation,

current Prime Minister Herman Van Rompuy and Finance Minister

Didier Reynders were able to conclude the sale of Fortis Bank

to BNP Paribas, which now has 75 percent ownership. The GOB



holds the remaining 25 percent (as well as a minority share

in BNP itself). Shareholders who had balked initially

finally approved the deal in May 2009. Fortis contributed

significantly to BNP's excellent second quarter 2009 results

announced in July 2009. The bank claims that many customers

who fled in September-October of 2008 are coming back. Fears

remain that some clients, particularly the Flemish ones, are

not keen on being with what is now a French bank (Fortis now

operates in Belgium as "BNP Paribas Fortis"). Many Flemish

customers are believed to have gone over to KBC, widely seen

as a "Flemish" bank, an important distinction in this

linguistically-divided country.



4. (SBU) Senior GOB leadership was consumed for months with

its involvement in the financial crisis, either in actual

negotiations and deliberations or in dealing with its

repercussions. To put it in economic terms, the opportunity

cost for the government was also great, both financially,

given its impact on the public debt, and politically, in that

the country's political leaders only had time to deal with

the financial crisis and left other important issues on the

back burner, such as institutional talks about how to divide

power among the regions and the federal government.



Dexia: Next in Line

--------------



5. (SBU) Dexia, a Belgo-French bank, was the Belgian bank

with the largest direct exposure to the U.S. subprime

problems through its ownership of Financial Security

Assistance (FSA),a monoline insurer of bonds for local

communities. Dexia required a joint bailout by the Belgian,

French and Luxembourg governments only days after Fortis was

first rescued in September 2008. At the time, then-Prime

Minister Leterme was quoted as saying that the Belgian

government "took concrete and correct decisions to reinforce

Dexia's health." In May 2009, Dexia finally managed to sell

FSA and thereby reduce its risk profile. Nevertheless,

according to unofficial French stress tests, it still is the

weakest of all Belgian banks. This is allegedly due to the

fact that its deposit base is almost exclusively in Belgium

and not in France, whereas the vast majority of its clients

are French municipalities.





KBC (Kredietbank): Three Rescues

--------------



6. (SBU) KBC (Kredietbank) has had to come knocking three

times on public doors: it was helped out initially by the

federal government in the fall of 2008 by a credit line of

3.5 billion Euros. In January 2009, the Flemish regional

government injected two billion Euros of fresh capital, but

in May 2009 the bank was forced to go for support from the

federal government yet again when its collateralized debt

obligations (CDO) portfolio was heavily affected by rating

downgrades. Although the bank now claims that all dubious

credits have effectively been written off, Belgian banking

officials worry that the bank may still experience tier I

problems. The package announced May 15 by Belgian Prime

Minister Van Rompuy consists of several tranches. A first

tranche of 1.6 billion Euros in losses will be borne by KBC

itself; a second tranche of eventual losses of two billion

Euros will be borne by the GOB or the Flemish regional

government, if KBC is not capable of finding fresh capital

among its current shareholders. This could mean that the

public sector (either the federal or Flemish regional

government) could ultimately own up to28 percent of the

bank's capital. If after tat second intervention KBC were

to need even or cash, the GOB has made available an

additional guarantee of 14.8 billion Euros. It is still

unclear when the expiration deadline for that guarantee is.

All these government guarantees and capital injections come

at a hefty price for KBC, possibly costing the bank as much

as 890 million Euros per year until 2016. These revenues

flowing to the GOB and/or Flemish government must be offset

against the cost of the loans the GOB and the Flemish

regional government had to take out to finance the rescues of

KBC (and Fortis and Dexia).





Economic Climate: Perhaps Worst Has Passed,

But Economy and Public Finances Still Weak

--------------



7. (SBU) Belgium is a highly open economy that relies

heavily on imports and exports (combined trade of goods and

services was about 175 percent of Gross Domestic Product or

GDP in 2008),so it is no surprise that as world trade has

contracted, so has Belgium's GDP, which most mainstream

forecasters expect to fall by anywhere between 3.2 to 4.4

percent in 2009 and by 0.2 to 0.6 percent in 2010. Inflation

is very low (forecasts of a 0.3 percent increase in the

Consumer Price Index for 2009) and business and consumer

confidence has been improving. Most industry surveys expect

the worst has passed. While trade is still off significantly

compared to 2008 levels, Belgium has run a small trade

surplus in April and May (the last two months for which data

are available),the first time this has happened since

November 2007. Unemployment, however, is expected to reach

over 10 percent in 2010; it was 7.0 percent in 2008. While

the GOB's economic stimulus plans for 2009 and 2010 are

modest (about 1.5 percent of GDP according to the

Organization for Economic Cooperation and Development, OECD),

the deficit could reach 4.4 percent in 2009 and overall

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Foreign Qinister Leterme

--------------



8Q (SBU) Your meeting with Foreign Minister Lete2me, who

started his job in July 2009, will give you an opportunity to

discuss the evolution f the Belgian rescue of its banks with

someone who, as Prime Minister, was intimately invoQved in

the Government's bailout of the key Be,gian banks. As the

rescue involved not only dealing with the private sector but

also authorQties (EU, French, Dutch, Luxembourg central

bQnkers and Finance ministry officials),Letere will likely

have excellent insights about the difficulties of

coordinating actions across borders. He may also be able to

discuss his view of the role of financial regulators during

and after the crisis. Finally, as Belgium's financial sector

makes guarded improvements, Leterme could have something to

say about how the GOB might benefit financially from its

interventions.



EASON

.