The Belgian Credit Guarantee Scheme

Following the failure of Lehman Brothers in September 2008, global financial markets were shaken significantly. This market pressure manifested itself as a global drying-up of liquidity and short and medium-term wholesale funding. The EURIBOR-OIS spread, which serves the same purpose as the oft-cited LIBOR-OIS spread as a proxy for overall market credit risk in European banks, rose from less than 10 basis points (bps) to almost 100 bps for all maturities, and nearly 165 bps for longer-term maturities in the third quarter of 2008.

Belgian banks were no different, experiencing sharp declines in share prices and steep price increases for access to wholesale financing. Several of the largest banks, including Fortis and Dexia, saw premiums on their credit default swaps (CDS) of various maturities shoot up by several hundred basis points, peaking out at around 500 bps for the two (2009 Financial Stability Overview). In particular, four of the largest Belgian institutions—Dexia, Ethias, Fortis, and KBC—faced potential liquidity shortages as institutional depositors and other sources of wholesale funding continued to pull away.

This lack of liquidity prompted the Belgian government to push an unprecedented amount of State aid into its financial sector. Aid ranged from increasing the deposit insurance ceiling from €20,000 to €100,000; to substantial targeted capital injections for a small group of systemically important financial institutions totaling tens of billions of euros; to broad-based State guarantee schemes to cover assets and liabilities entered into by Belgian financial institutions. This case study focuses specifically on the government’s program to guarantee liabilities.

The original credit guarantee, based on the Law of October 15, 2008, in the Belgian Official Gazette, aimed to restore confidence in the financial sector and promote access to funding sources that had been closed off by the global credit crunch. The Law of October 15, 2008, introduced Article 117bis in the Law of 2 August 2002 (later abrogated by Article 23 of the Law of July 2, 2010).^FNArticle 117 itself specified that the National Bank of Belgium (NBB), the Banking, Finance, and Insurance Commission (CBFA), and the Office of Insurance Control (OCA) work together and collaborate on matters of common interest, which included (1) “the stability of the financial system as a whole”; (2) “the interactions between prudential supervision and control of systemic risks of payment and settlement systems”; (3) “coordination of crisis management”; and (4) “the guarantee of deposits and the protection of investors”, among others (Article 117, Belgian National Gazette, 2002-09-04).  Article 117bis gave the Belgian government the ability to enact policies that could deviate from implemented financial statutes based on exigent circumstances and the condition of its financial system. It provided Belgian authorities a substantial amount of legal flexibility in a time of crisis and specifically vested the Belgian government^FNThe king acting by Royal Decree, i.e. a mandatory legal act of general application adopted by the executive branch.
with the power to adopt a “system of guarantees of commitments entered into by supervised institutions” (Article 117bis, Belgian National Gazette, 2008-10-15). Solvency and liquidity concerns, particularly with larger banks like Dexia, Fortis, and others, had been mounting, and the adoption of Article 117bis by the Law of October 15, 2008, pursuant to which eligible institutions could issue government-guaranteed debt, allowed Belgian authorities to implement any programs necessary to alleviate these substantial pressures. The government implemented Article 117bis and adopted the Royal Decree of December 10, 2008, on the guarantee of certain risks assumed by financial institutions.

The types of eligible liabilities were extensive, and included, “all of the financing raised by a beneficiary institution in order to obtain refinancing from credit institutions and institutional counterparties and would cover instruments such as bonds and debt securities issued by the beneficiary to institutional investors, as well as interbank deposits, fiduciary deposits, deposits of central banks, deposits of institutions, commercial paper, certificates of deposit and medium-term notes.” There was some objection to the breadth of the eligibility criteria by the European Central Bank (ECB), specifically with respect to the decision to include interbank deposits. No specific liabilities were excluded (European Central Bank 2008b).

Participating financial institutions were required to meet the following conditions: (1) beneficiaries would take measures aimed at supporting their financial situation, solvency, and liquidity, and (2) the granting of a guarantee would be justified in the interests of the Belgian economy and by the protection of all depositors. The ECB raised objections to these conditions as well, citing the Law of 2 August 2002’s requirement of a “sudden crisis on the financial markets or of a serious threat of systemic crisis” and arguing that Belgium’s conditions did not reflect this requirement. These conditions were not amended in the final version of Article 117bis.

To have their debt guaranteed by the government, institutions also had to prove that (1) they were unable to issue new liabilities to cover maturing liabilities absent the guarantee and (ii) the guarantee was be “necessary to ensure their continuity.” Additionally, the Minister of Finance was allowed to lay down further conditions for the guarantee, including “setting its ceiling, specifying the remuneration to be paid for the granting of the guarantee, and any other modality aimed at ensuring compliance with the two abovementioned conditions” (European Central Bank 2008b).

The Belgian approach was an “opt-in” one, so banks had to apply to gain access to the guarantee. The fee structure was originally unspecified, suggesting that a per-bank analysis would be used to assess the exact fee amounts (European Central Bank 2008c) The policy could be applied retroactively, covering bonds that had been issued or renewed from October 9, 2008, until October 31, 2009, with maturity dates of no later than October 31, 2011. Therefore, guaranteed obligations could have maturities of slightly more than three years at most.

While the fee structures were unspecified in the original agreement (European Central Bank 2008c), another Royal Decree, issued on April 14, 2009, clarified and homogenized the fees. The amendment provided that the guarantee fee consisted of: (1) a set-up fee of 70 basis points (bps) of the principal amount covered by the guarantee, and (2) an annual guarantee fee of 100 bps of the principal amounts covered by the guarantee, paid quarterly.

The guarantee scheme was renewed on October 7, 2009, by Belgian authorities despite a lack of usage. This extension was made primarily because it was seen as “necessary given the continuation of financial market turbulence, and in particular financial institutions’ continued refinancing difficulties.” Belgian authorities extended the final maturity date of the State guarantee from October 31, 2011, to October 31, 2014. Additionally, the window during which guaranteed liabilities could be issued was extended from October 31, 2009, to October 31, 2010. Last, the maximum maturity window was also increased to match the new conditions. On October 14, 2009, the Belgian, French, and Luxembourg authorities would, on October 14, 2009, amended the issuance window and maturity horizon in the Dexia agreement in the same way.

Despite the extension, no banks applied for the guarantee scheme. The scheme therefore expired on October 31, 2010.