The Belgian Credit Guarantee Scheme

In addition to the debt guarantee scheme, the Belgian government also increased its limit of deposit insurance covered by the Protection Fund from €20,000 to €100,000. They also incorporated a broad-based asset protection scheme from the Royal Decree of December 10, 2008, that covered, “directly or indirectly, losses or risks of losses on financial assets held by subsidiaries, whether direct or indirect, of the guaranteed entity,” and capital injections for certain large institutional rescues as well. The Belgian government also engaged in a number of ad hoc rescues, the most notable of which being that of Dexia. The Dexia agreement, finalized on October 14, 2009, served as the model for the State guarantee scheme.

Article 117bis, introduced by the Law of October 15, 2008, added to the statutory authority of Article 117 of the Law of August 2, 2002, which specifically outlined financial stability and crisis management, among other things, as matters of common interest between the National Bank of Belgium (NBB) and the Banking, Finance, and Insurance Commission (CBFA). Article 117bis allowed the Belgian government to “provide for supplements to, or deviations from, the Belgian Credit Institutions Supervision Law, the Insurance Undertakings Supervision Law, the Investment Services Law, and the Financial Sector and Financial Services Supervision Law” under exigent circumstances. It also provided for “a system of State guarantees for credit institutions, insurance undertakings and other financial institutions (as will be further determined by Royal Decree)”.

As a form of state aid, the guarantee scheme was subject to review and approval by the European Commission.

Belgian authorities’ approach was to evaluate any bank that came forward on a case-by-case basis. While no guaranteed debt was issued, a total size was never specified for the program.

All credit institutions, financial holding companies, investment firms, as well as any financial institution under prudential supervision were eligible to participate (Petrovic and Tutsch 2009).

Specifically, the Belgian government publicly announced that liabilities covered 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 deposits and medium-term notes” (European Central Bank 2008b).

However, the ECB indicated in its initial consultations on the law that it believed the criteria for eligible debt was too broad, particularly with the inclusion of interbank deposits. Their concerns primarily addressed the possibility that such broad-based eligibility criteria would harm euro-area efforts to harmonize monetary policy responses. The Belgian government did not address these criticisms and kept interbank deposits among the covered liabilities (European Central Bank 2008b).

Debt that would have been issued under the October 2008 guarantee had an ultimate maturity date of up to October 31, 2011. Therefore, the maximum maturity for any guaranteed debt would have been slightly more than three years. However, the issuance window and maturity horizon were extended on October 7, 2009, to October 31, 2011, and for liabilities maturing up to October 31, 2014, respectively, providing for a maximum potential maturity of slightly more than five years.

Program documents did not contain any restrictions on the currencies eligible for participation in the scheme.

There is no indication that there were individual ceilings on the amount of guaranteed debt that a given institution could issue.

The State guarantee fee structures were originally to be determined on a case-by-case basis (European Central Bank 2008c), but were further specified by the Royal Decree of April 14, 2009. The fees included a set-up fee of 70 bps of the principal amount the guarantee covered and an annual guarantee fee of 100 bps of the principal amounts covered by the guarantee, paid quarterly.

Participation conditions for beneficiaries mandated that institutions “take measures aimed at supporting their financial situation, solvency, and liquidity,” and that, should a guarantee be granted, it would be in the interests of the Belgian economy and by the protection of all depositors.

After being approved, beneficiaries were able to issue government-guaranteed debt only if they were able to show that it would not be possible for them to meet the liabilities that would be covered by said guarantee at their maturity without it and that the invoking of said State guarantee was necessary for the beneficiary’s continuity (European Central Bank 2008b).

The Finance Minister had substantial discretionary authority to “lay down further modalities and conditions for a State 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 Minister of Finance also had the authority to terminate any guarantee agreement at any time.

The original State guarantee was implemented October 17, 2008, retroactive from October 9, 2008, and extending to October 31, 2009, with an ultimate maturity date of October 31, 2011. It was later further extended on October 7, 2009, which lengthened the issuance window to October 31, 2010, and the ultimate maturity date to October 31, 2014.