VZCZCXYZ0000
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 
.