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Belgian bonds resilient as market ignores surprise downgrade
December 27, 2016 / 11:10 AM / a year ago

Belgian bonds resilient as market ignores surprise downgrade

* Belgium yields 14bp below France despite lower rating

* Downgrade by Fitch is not convincing, says strategist

* Italy may need to put in 6.5 bln euro to rescue BMPS

* Greece debt relief talks to resume -eurogroup head

By Abhinav Ramnarayan

LONDON, Dec 27 (Reuters) - Belgian bonds on Tuesday weathered an unexpected rating downgrade, highlighting a divergence between how the market and some credit agencies view the country’s debt profile.

Italian bonds lagged, however, with the 10-year yield rising 3 bps to 1.84 percent by 1015 GMT, after three sources close to the matter told Reuters the government in Rome was likely to have to put in around 6.5 billion euros ($6.79 billion) to rescue troubled bank Monte dei Paschi di Siena.

An auction scheduled for Thursday also put pressure on Italian bonds.

Fitch cut Belgium’s rating by one notch to AA- on Friday evening, citing its relatively high debt and upward revisions to fiscal deficit targets.

DZ Bank strategist Daniel Lenz said he was “not at all convinced” by the notion of cutting Belgium by one notch while keeping France unchanged “even though (it) faces similar pressures”.

Fitch earlier this month maintained France’s rating at AA with a stable outlook.

Lenz cited Belgium’s “better unemployment figures, better current account deficit and upcoming elections in France” as all reasons why he believes Belgium should be rated at least on a par with France.

Belgium’s debt to GDP ratio is however higher at 105.8 percent compared to France’s 96.20 percent, as of 2015, according to Reuters data.

With Fitch’s downgrade, France is rated a notch higher than Belgium by three of the four main credit agencies.

However, Belgium’s borrowing costs remain lower than those of its neighbour.

At 1015 GMT on Tuesday the yield on Belgium’s 10-year government bond was flat at 0.56 percent, 14 basis points below the French equivalent, which was also unchanged at 0.70 percent.

Two-year Greek government bond yields traded at 7.86 percent, close to recent highs, as investors reacted cautiously to weekend comments from Eurogroup chief Jeroen Dijsselbloem that talks about initial debt relief measures for Athens would resume.

Debt relief was frozen mid-month over Greece’s decision to pay pensioners a Christmas bonus.

“I think overall this is positive news for the Greek government, and it will be eventually reflected in markets. Trading is thin at the moment so it is hard to read too much into it,” said Lenz.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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