Belgian Government's borrowing costs reach decade-long high

Belgian Government's borrowing costs reach decade-long high
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Following a succession of crises, the Belgian Government's soaring borrowing costs are reaching levels not seen for more than a decade, l'Echo and De Tijd have reported.

On Tuesday, the Belgian Debt Agency issued two tranches of short-term government bonds worth a total of €2.6 billion, with an interest rate of 2.31% on the first tranche of €1.41 billion (due in May 2023), and a rate of 2.57% on the second tranche of €1.19 billion (due in July 2023).

According to Debt Agency Director Jean Deboutte, the rate paid on this second tranche is the highest paid by the Belgian State on short-term bonds since November 2008. Deboutte also noted that, at the last issue of such short term-bonds on 13 December, the rates were significantly lower, with yields of 1.49% for bonds maturing in March 2023 and 2.5% for those due in November 2023.

Belgium is one of the few eurozone countries to issue such short-term debt (i.e. with a maturity of less than a year), which it does twice a month. The bonds are typically highly sought after by institutional investors as a liquid and highly secure investment.

Part of a larger pattern

In addition to rate increases for its short-term debt, the Belgian Government's medium-term and long-term bonds have also experienced rapid rate rises. Yields on one-year ('Olo') bonds are currently at 2.85%, the highest level since November 2011. Similarly, rates on ten-year government bonds reached 3.21% just before New Year, the highest level since mid-2012. (They have since fallen slightly to 3.01%.)

Deboutte points out, however, that the high yields on government debt are common to virtually the entire eurozone. Indeed, he notes that "the French one-year rate is at an almost identical level" to that of Belgium.

The ultimate cause of the increased yields is central banks' decision to rapidly increase interest rates in their efforts to curb the soaring inflation precipitated by Russia's invasion of Ukraine earlier this year. Last year, the European Central Bank (ECB) increased its benchmark rate on four separate occasions, with its President, Christine Lagarde, claiming in November that "we still have a way to go" and that the ECB "will continue to raise interest rates" until inflation is under control.

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Moreover, similar rate hikes by the US Federal Reserve, the Bank of England, and other central banks have pushed up their respective bond yields to record levels, causing a decrease in demand for the debt of eurozone countries, thus forcing the latter to raise their own bond rates to attract investors.

The increased rates on government debt come at a particularly troubled time for Belgium, whose debt-to-GDP ratio and budget deficit are already amongst the highest in the EU. Indeed, in an almost unprecedented move, in recent months both the EU and the IMF have explicitly criticised the country's fiscal profligacy.

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