Belgium: From the Frying Pan into the Fire

Belgium's political crisis is deepening and since it is part of the euro zone, it is being reflected in the Belgian debt market. The 10-year bond yield is up 10 bp today to above 4% and the 2-year yield is up 4 bp. Late yesterday the seven parties failed to resolve their differences and put in a new government. Recall that last month, S&P put Belgium's AA+ rating on negative watch due in large part to the political stalemate which prevents strong action to stabilize Belgium's debt, which is among the highest in the euro zone (as a percentage of GDP).

The election was in mid-June last year and the Belgium premium of almost 80 bp. It now is above 105 bp. Of course, the pressures on the euro zone are actually much larger than Belgium, but this is yet another example, of a weak political situation preventing addressing the financial challenges. Belgium may be dissolving and although it is common to compare US problems with Europe's, there is nothing comparable in the US of a dissolution of a country or some state or states leaving.