On June 10, Belgian voters went to the polls to elect new members for bicameral Federal Parliament of Belgium. The 150 members of the Chamber of Representatives were elected from 11 electoral districts and the 40 Senate members were elected from the Dutch and Francophone electoral colleges, with 25 and 15 elected from each respectively.

The overall outcome of the elections was as follows. The liberal fraction, represented by the Mouvement Réformateur, and the Open VLD, became the largest group in parliament. Following the liberal fraction was the Christian Democrats, represented by the Christen Democratisch & Vlaams, the Centre Démocrate Humaniste, and the Nieuw-Vlaamse Alliantie. The liberal fraction won a total of 41 seats in the Chamber of Representatives, and 11 seats in the Senate. The Mouvement Réformateur won 29 seats overall, with 23 in the Chamber of Representatives and 6 in the Senate, while the Open VLD won 23 seats in total, with 18 in the Chamber of Representatives and 5 in the Senate. The Christen Democratisch & Vlaams along with the Nieuw-Vlaamse Alliantie won a total of 39 seats, with 30 seats in the Chamber of Representatives and 9 seats in the Senate. The electoral alliance between the Flemish the Christen Democratisch & Vlaams and Nieuw-Vlaamse Alliantie parties became the biggest single parliamentary grouping as there is no electoral alliance between the Mouvement Réformateur, and the Open VLD. Putting the results a little further into context, the liberal fraction lost 8 seats in the Chamber of Representatives, and lost 1 seat in the Senate. The Christian Democrats gained 8 seats in the Chamber of Representatives, and 3 seats in the Senate.

Along with the general elections came the re-emergence of the issue of the Brussels-Halle-Vilvoorde. The Brussels-Halle-Vilvoorde, BHV for short, is a Belgian electoral arrondissement in the center of the country. The BHV encompasses the officially bilingual Brussels-Capital Region, which coincides with the administrative arrondissment of Brussels-Capital, as well as the officially Dutch-speaking area around it, the Halle-Vilvoore, which forms a separate administrative arrondissement.

In European and national elections voters in the Brussels-Halle-Vilvoorde district can vote for candidates from both the French and Flemish communities although the Halle-Vilvoorde area belongs solely to the Flemish community. Voters can vote for candidates and parties who belong to another constitutionally established Community and Region. There in lies the problem. Since the BHV district is a mixture of French and Flemish speaking residents, French-speaking parties are opposed to dividing the BHV electoral district, while the Flemish parties are equally in favor of a split.

It was around 2000 that the Flemish parties saw the need to split the electoral district. In 2002 the Court of Arbitration condemned the situation as unconstitutional, however, no solution was proposed, and the matter was left largely unattended and unchanged. There has been a debate between cabinet ministers and parties over the future of the district brewing since 2005. A deadline date of May 11, 2005 was set for a decision to be reached, but quickly expired after the debating parties fell short of making any definitive decision. The issue emerged once again ahead of the 2007 elections as the Federal Government failed to uphold with the Court of Arbitration’s 2002 ruling. The Court of Arbitration gave the government the time to fix the problem until the next elections should been scheduled, after that election results could be declared void. On November 7, 2007 the Flemish-speaking parties voted to split up the Brussels Halle Vilvoorde electoral region the French-speaking parties refused to vote. The Flemish vote effectively stripped voting rights from 120 000 francophone voters. On November 9, 2007 King Albert II intervened removing the state reform from agenda for the negotiations, and instructing the chairmen of the both the Senate and the Chamber of Representatives to begin a dialogue on the matter. In a joint statement, the Christen Democratisch & Vlaams along with the Nieuw-Vlaamse Alliantie electoral alliance rejected the decision, leaving the future of the country in limbo.

During the recent weeks of unrest, Belgian government bond yields have been on an upward trend. The yield spread between the 2 and 10-year OLOs widened to its greatest margin in about 5 years. The spread between the 10-year OLO and the 10-year bund rose to its highest point since the third-quarter of 2002. The Yield on the 10-year OLO surpassed that of the 10-year note for the first time since late 2004. As political uncertainty persists in Belgium, government bond yields continue to follow an upward trend as investors sell bonds in an attempt to protect themselves from risk. While government backed investments are usually considered amongst the safer investments, the prolonged period of political unrest has led some spectators to believe that the Belgian government may split as both sides seem unlikely to compromise. In the event that the government disbands, debt holders run the risk of losing some or all of their investment. It is possible that the government will put a moratorium on outstanding debt for an unspecified period of time, during which the newly divided states of the former country settle. After settling, the two sides will debate over who is responsible for the repayment of the outstanding debt. Debt holders run the risk of losing all of their investments if the government defaults. The Belgian Treasury currently has approximately €223.3B outstanding held in OLOs, that is medium-term, long-term, and very long-term securities, just over 50% of which is held by investors outside of Belgium.

In a recent e-mail interview with Jean Deboutte, the Director of Strategy and Risk Management at the Belgian Debt Agency, Deboutte acknowledged that the scenario of a split is purely hypothetical, but admitted that the issue of what should happen to government debt in such a situation has not yet been addressed. Deboutte assured however that, whatever decisions were made, investors would not lose their money as, afterward it would be impossible for Belgium or for its remaining parts to obtain financing of any kind again.

While Deboutte’s comments are reassuring, investors may still find themselves in a precarious position. Recall the Russian financial crisis of 1998, which occurred during the global recession of 1998. In a recessionary environment, a decline in productivity, along with an artificially high fixed exchange rate between the ruble and foreign currencies set the background for the crisis. Additionally, Russia’s foreign reserves were impacted by the East Asian Currency Crisis that had begun in 1997 and the following declines in both the price and demand for crude oil and nonferrous metals. At the same time Russia was in the midst of a political crisis, which came to a head in when President Yeltsin dismissed Prime Minister Chernomyrdin along with his entire cabinet. After a $22.6 billion financial package from the IMF and the World Bank to aid in reforms and the stabilization of the Russian market place failed, there was an unprecedented flight of foreign capital from Russia. On August 17, 1998 an escalating payment crisis forced Russia to significantly devalue the ruble, declare its intention to restructure all official domestic currency debt obligations by 2000 and impose a 90-day moratorium on the repayment of private external debt. Russia’s quick recovery was the result of a bounce back in oil prices, an increase in consumer demand, and a drop in unemployment amongst other factors. Before bouncing back, Russia also received the aid of The London Club, a group of private creditors that signed a deal on October 6, 1998 to restructure Soviet-era debts totaling $32 billion. The deal allowed Russia to pay off $32 billion in debt over 25 years. The deal with the London Club followed shortly after the country joined the Paris Club of official creditors, after signing an agreement that would allow Russia to reschedule $40 billion in Soviet debt over 25 years.

The similarities between the global market place during the Russian financial crisis of 1998 and the current market environment are intriguing. Political unrest leaves the future of Belgium in limbo, as Yeltsin’s decision to dismiss Prime Minister Chernomyrdin along with his entire cabinet left the future of Russia in limbo. The Euro exchange-rate, which, in recent weeks has breached its all time synthetic highs against the weak US Dollar, is beginning to impede European economic growth. In many ways the recent decline in the US Dollar mirrors the decline in East Asian currencies during the East Asian Currency Crisis. The United States is currently in the midst of an Economic slowdown, which stands to have a huge effect on the global market place. Although many believe that the stage isn’t set for a recession, with billions in unclaimed faulty sub-prime loans floating around the future does not look bright for the world’s largest economy. Crude oil and food prices are spiraling to all time highs, creating a global inflationary environment. While low oil prices hurt the Russian economy, high oil prices, amongst other things, have kept the European Central Bank on fiscal tightening track as average inflation is seen dangerously close to the 2.0% target level in 2008. With no sign of FX intervention in sight, another ECB interest rate hike could take the Euro exchange rate to levels that really start to hinder European economic growth.

The implications of a downfall in Belgium on the Euro-Zone economy could be significant. The Belgian economy is the17th-largest in the world according to statistics compiled in 2006 and ranks as the 10th-largest market for the export of U.S. goods. With France, the largest economy in the Euro-Zone next to Germany, already voicing concern over the Euro FX level, and with German companies slowly admitting that the exchange rate could have negative effects on business, political unrest in Belgium could push the Euro-Zone to face one of its first major tests since its inception. Whether the effects of a Belgian break-up could reach further than its borders remains to be seen. What is certain is that a break-up could have far-reaching economic consequences within the country, and would leave debt holders in a rather precarious position.

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John J. Phillips IV

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