Identifier
Created
Classification
Origin
09BRUSSELS1164
2009-08-20 16:41:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Brussels
Cable title:
BELGOIM: FINANCIAL SECTOR SCENESETTER FOR CODEL SHELBY (AUGUST 28-30)
how-toVZCZCXYZ0000 RR RUEHWEB DE RUEHBS #1164/01 2321641 ZNR UUUUU ZZH R 201641Z AUG 09 FM AMEMBASSY BRUSSELS TO RUEHC/SECSTATE WASHDC 9384 INFO RUEATRS/DEPT OF TREASURY WASHDC RUCPDOC/DEPT OF COMMERCE WASHDC
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
pu100 percent of GDP in 2010hange. Until(##)directly
impacte more military and
to Afghanistan and other overall defense spending is
recommended two percent (##)
increase any time soon (##)Programme will
try to get back in balance by 2015 annual
tightening by about(##)
year starting in 20(##)fiscal
situationroblem of an aging
(##)to find additional resource
future social security obligations in the coming
years.
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
.
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
pu100 percent of GDP in 2010hange. Until(##)directly
impacte more military and
to Afghanistan and other overall defense spending is
recommended two percent (##)
increase any time soon (##)Programme will
try to get back in balance by 2015 annual
tightening by about(##)
year starting in 20(##)fiscal
situationroblem of an aging
(##)to find additional resource
future social security obligations in the coming
years.
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
.