WASHINGTON (MNI) – Fitch Ratings Monday revised its outlook on
Belgium from stable to negative, while affirming its ratings at ‘AA+’.
The following is the full text of Fitch’s statement:

Fitch Ratings has revised Belgium’s rating Outlook to Negative from
Stable and affirmed its Long-term foreign and local currency Issuer
Default Ratings (IDRs) at ‘AA+’. Fitch has simultaneously affirmed
Belgium’s Short-term rating of ‘F1+’ and Country Ceiling of ‘AAA’.

“The Negative Outlook reflects Fitch’s concerns over the pace of
structural reform in the coming years and the ability to accelerate
fiscal consolidation without a resolution to the constitutional crisis,”
says Douglas Renwick, Director in Fitch’s Sovereign group. “However,
despite the ongoing political dispute, day-to-day fiscal management has
remained strong, in keeping with Belgium’s high-grade rating.”

In Fitch’s view, without political agreement over constitutional
reform, it will be difficult to achieve a balanced budget at general
government level as laid out in Belgium’s Stability Programme. This
would require budgetary surplus at lower levels of government and/or
significant social security reform, either of which would likely become
entangled in Belgium’s linguistic-community dispute. Sustained debt
reduction will require fiscal reform as well as fiscal discipline over
the coming years, which in turn requires a new government with a fresh
mandate.

Political risk is higher in Belgium than in other euro-area peers
given the fractious disputes over the future shape of the state. Fitch
notes, however, that the caretaker government (in place since April
2010) has significant budgetary powers and the agency does not expect
the political turmoil to pose a threat to fiscal performance this year
(a deficit of 3.6% of GDP is budgeted for 2011). Belgium’s deficit
outturn for 2010 (4.1% of GDP) was better than expected and
stabilisation of debt/GDP has been achieved, in contrast to with most
euro area peers.

However, the high level of public debt (96.6% of GDP in 2010)
leaves the government with little spare fiscal capacity to deal with
future shocks. This makes the rating sensitive to risks surrounding the
government’s medium-term fiscal objectives, which Fitch views as
significant. Slippage from official deficit targets would likely result
in a downgrade.

Despite a relatively solid economic performance through the crisis
to date, Fitch notes some factors which could hinder growth over the
long term. The labour market has significant rigidities, with limited
responsiveness of wages to productivity. Product market regulation is
also significant. Belgium’s banking system was hard hit by the crisis
and has required substantial state support (the upfront cost of bank
bailouts has added around 6% of GDP to the public debt). Banks’ domestic
exposures are relatively low risk but claims on peripheral euro area and
CEE entities are significant.

The ‘AA+’ rating is underpinned by Belgium’s structural strengths:
an advanced, diversified economy with high income per capita, high
domestic savings and low private sector debt. The economy’s external
balance sheet is strong, with relatively low international leverage,
current account surplus and a net foreign asset position. All these are
characteristics of a “core” euro area sovereign.

** Market News International Washington Bureau: 202-371-2121 **

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