"whether Belgium – already one of the world’s most decentralised states – is likely to survive as a single entity."

I suppose this constitutes something more like divorcing your neighbor. It's interesting that the financial crisis is here effecting the political crisis. From the FT:

"Belgium edges towards political crisis

By Tony Barber in Brussels

Published: December 19 2008 18:09 | Last updated: December 19 2008 18:09

Belgium slipped closer towards a full-blown political crisis on Friday when Yves Leterme, prime minister, proposed his government’s resignation after the nation’s supreme court found signs of government interference with the judicial system.

Mr Leterme’s gesture did not automatically mean the collapse of his five-party ruling coalition, because King Albert II, as head of state, has the power to accept or reject his resignation. During an earlier government crisis in July, the king rejected it( I DIDN'T REMEMBER THAT THEY HAD A KING ).

Nevertheless, the turmoil underlined how a seemingly permanent atmosphere of confusion and disunity in Belgian politics has caused more and more speculation about whether Belgium – already one of the world’s most decentralised states – is likely to survive as a single entity( NO ).

The latest trouble concerns allegations that the government tried to influence a court decision on the break-up of Fortis, the former Belgian-Dutch financial services group( THIS COMPANY IS A PART OF THE CURRENT FINANCIAL SHAKEUP ). The first political casualty was Jo Vandeurzen, Belgium’s justice minister, who resigned on Friday before Mr Leterme’s proposal that the entire government should quit.

Political commentators were virtually unanimous that the Fortis affair had damaged Mr Leterme, even though the supreme court report that prompted his resignation offer concluded there was no watertight evidence that the government had crossed the strict line supposed to divide politics from justice.

There was no “legal proof of an attempt to interfere with the judiciary, but there are undoubtedly significant indicators that point in that direction”, Ghislain Londers, the court chairman, said in the report.

Under a worst-case scenario, the entire five-party government might be forced from office, destabilising Belgium at a time of severe fiscal and economic challenges and recalling the long spell of paralysis that followed the most recent general election in June 2007.

Profound divisions between Belgium’s French-speaking and Flemish-speaking political parties and linguistic communities prevented Mr Leterme, a Flemish Christian Democrat, from forming a government for nine months and have hobbled his coalition ever since.

The government has been keen to put on a show of strength and stability during the global financial turbulence and European economic recession, because together the two crises threaten to put great strain on Belgium’s public finances.

The Belgian public debt is more than 80 per cent of gross domestic product – well below the 130 per cent recorded in the early 1990s, but high enough to require a firm hand on the public finances in today’s circumstances.

In spite of their quarrels, the French- and Flemish-speaking parties found enough common ground this year to reach an informal understanding that they would ask Belgians to return to the polls next June.

For narrow reasons of party political advantage, few wanted to let the Fortis affair explode into such a huge scandal that they would be obliged to tear up this informal pact. But their power to contain the affair was limited by the sheer gravity of the charge of interference with the judiciary.

The affair burst into the open after an appeals court in Brussels ruled that Fortis shareholders should have been consulted about a government-backed plan to sell part of the bank’s assets to BNP Paribas of France."

Here's what this is about. From Bloomberg:

"Dec. 19 (Bloomberg) -- Fortis, the insurer that was once Belgium’s largest financial-services firm, clashed with some investors at a meeting in Brussels by sticking to an agreement to sell the Belgian insurance business to BNP Paribas SA( FRENCH ).

The board of Fortis is considering a challenge to a Dec. 12 court injunction that ordered the transaction to be put to investors for a vote by Feb. 12, Vice Chairman Jan-Michiel Hessels told investors at an extraordinary shareholders’ meeting in Brussels today.

“Both parties can walk away from the deal after Feb. 28,” Hessels told investors, adding that neither Fortis nor BNP Paribas is obliged to pay a break-up fee should the transaction fall through. “Things have only gotten worse since we agreed to sell and I expect more negative news to come from the financial crisis, affecting the valuation of assets.”

Fortis on Oct. 6 agreed to sell Fortis Insurance Belgium NV, the country’s largest insurance company, to BNP Paribas for 5.7 billion euros ($8 billion) in cash. The transaction was part of a state-organized breakup( PLEASE NOTE THIS ) of Fortis, meant to prevent the collapse( NOTE WELL ) of its main banking unit with about 238 billion euros of deposits at the time, according to a presentation on Paris-based BNP Paribas’s Web site.

Markdowns

Fortis Insurance Belgium had 2.1 billion euros of shareholders’ equity as of Sept. 30, after posting a third- quarter loss of 281 million euros after markdowns and losses on investments totaling 339 million euros after tax, Fortis said Dec. 17.

“To be honest, I’m not happy with the court ruling because time is running out,” Hessels said. “Market conditions continue to deteriorate and BNP Paribas will think three times before going ahead with the purchase.”

Fortis shareholders voted 97 percent in favor of a proposal today to continue the activities of the Belgian holding company Fortis SA/NV. Under Belgian corporate law, Fortis had to put the possibility of liquidation to a vote after shareholders’ equity fell to less than half of the statutory capital.

To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net"

"“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,”

You can see the following behavior as sensible or over the top. From Bloomberg:

"By Matthew Benjamin and Liz Capo McCormick

Dec. 15 (Bloomberg) -- Bill Clinton was forced to abandon spending initiatives to boost the economy at the start of his presidency when advisers warned him that the borrowing needed to fund the programs would push interest rates higher. President- elect Barack Obama may not have the same problem.

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Instead of shunning the U.S., where losses on subprime mortgages in 2007 triggered a global seizure in credit markets that led to the downfall of securities firms Bear Stearns Cos. and Lehman Brothers Holdings Inc., investors can’t get enough Treasuries. Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal.

“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

This Fear and Aversion To Risk and the accompanying Flight To Safety are not driven but fundamentals and clear analysis. Could these investments prove sensible? Of course they could, but the Flight To Safety appears overdone.

Why to the US?

"Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve.

Purchases accelerated even as the yield on the benchmark two-year Treasury note tumbled to 0.76 percent last week from this year’s peak of 3.11 percent on June 13. Rates on three- month bills turned negative on Dec. 9 for the first time. The same day, the U.S. sold $30 billion of four-week bills at a zero percent rate. Yields on two-, 10- and 30-year Treasuries last week all fell to lowest since the U.S. began regular sales of those securities.

The two-year note yielded 0.73 percent as of 2:32 p.m. in New York, according to BGCantor Market Data, after falling as low as 0.66 percent on Dec. 12.

The drop in yields drove bond prices higher, pushing returns to 12.4 percent on average this year, the best performance since they gained 13.4 percent in 2000, according to New York-based Merrill Lynch & Co.’s U.S. Treasury Master Index. The returns compare with a drop of 41 percent in the Standard & Poor’s 500 Index and average losses of 15 percent in Merrill Lynch’s broadest corporate bond index."

If you had purchased bonds with higher yields, then you would be doing quite well now, which is why William Gross wishes that he had done so.

“This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said.

Japan’s bond market suggests that low yields may remain for a sustained period. In an effort to revive sagging growth in the 1990s, the world’s second largest economy ran its national debt to 1.5 times of gross domestic product. Yields on Japanese bonds are near the lowest in three years, with the country’s benchmark 10-year bond paying 1.40 percent, compared with 2.59 percent in the U.S. The national debt in the U.S. is 72 percent of GDP.

“It’s good news,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington. “Even though we’re borrowing larger amounts of money, the total amount we’re going to pay in interest is going to be somewhat lower.”

Why aren't the people who claim that buying Toxic Assets during this crisis and Spending Money On Infrastructure now because wages and other costs are lower, recommending that we borrow freely now for no interest?

"Interest was $92.5 billion from August through November 2007 on the $9.15 trillion in total debt outstanding, resulting in interest expense of 1.01 percent. In the same period a year later, interest was $87.5 billion on $10.66 trillion in total debt, dropping the expense to 0.8 percent.

While the median estimate of 49 economists and strategists is for 10-year Treasury yields to end 2009 at 3.65 percent, that’s still below the average of 6.91 percent paid on the securities since 1962. The security helps determine corporate and consumer borrowing rates.

Obama plans an economic stimulus package that may approach $1 trillion, in addition to a middle-class tax cut and universal health care, which may add $4 trillion or more to the national debt over 10 years, according to the Tax Policy Center in Washington and health-care economists."

So we will borrow for less?

"The U.S. already posted a record $401.6 billion budget shortfall for the first two months of fiscal 2009, which began Oct. 1, according to a Treasury report last week. The largest postwar budget deficit by the U.S. was $412.7 billion in 2004.

“The role of the deepening economic slump in this deterioration coupled with the escalating size of the likely fiscal stimulus puts the deficit on course to exceed $1 trillion,” Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients. “This implies upside risk to our $2 trillion figure for Treasury supply.”

Clinton’s proposals to spur the economy early in his administration in 1993 were stymied by concern how bond investors would react, according to James Carville, a Clinton consultant during the 1992 presidential campaign.

“Early in the Clinton days, the hallmark of policy was if you did this, how would it affect the bond market,” Carville said in an interview last year. “Every time I would talk to someone they would say ‘you can’t do that, it will freak the bond market out.’ I said ‘goddamn, whoever the bond market is, these bastards are powerful.’”

The potential for massive deficits has done nothing to damp demand for government debt as the U.S. prepares to spend $8.5 trillion to bailout financial institutions, homeowners and the economy. The biggest deficit as a percentage of the economy was 6 percent in 1983. A trillion-dollar 2009 gap would top that.

To prevent yields from rising, Fed policy makers indicated that the central bank may buy Treasuries. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that he would consider such a measure, saying one option is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

“If there is a whiff of anything getting worse, the Fed can just go downstairs and start that printing press,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “They can easily stop targeting the federal funds rate and start targeting a two- or five-year Treasury yield.”

Policy makers may also cut interest rates again, which may keep bond yields low. The Federal Open Market Committee will reduce its target rate for overnight loans between banks by a half-percentage point, to a record 0.50 percent, when it meets Dec. 15-16, according to the majority of economists surveyed by Bloomberg News.

The U.S. economy has been in a recession for a year, the National Bureau of Economic Research declared on Dec 1. The economy will continue to contract through June, with unemployment rising above 8 percent the end of 2009, from 6.7 percent last month and this year’s low of 4.8 percent in February, according to Bloomberg surveys of economists. That would make the current slump the longest since the Great Depression.

“In some ways it’s ironic,” said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York. “The U.S. turned down first and the crisis appeared first in the U.S., yet people continue to flock to the U.S. government debt market because it’s the biggest and deepest market in the world and still has a low risk.”

The U.S. will eventually have to commit to balanced budgets, said Alice Rivlin, former Fed vice chairman and founding director of the Congressional Budget office.

“We can’t press our luck,” said Rivlin, now a scholar at the Brookings Institution in Washington. “Eventually, we’ve got to show the world that we are fiscally responsible.”

This post went far and wide, then wider, but the points about printing money and showing that eventually we're going to handle this debt and deficit are correct points to be made.

"Moreover, how could the US government ever renege on its debts?"

I can't see this happening, but these are smart guys. Here's Yves Smith on Naked Capitalism:

"We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap:
The tectonic plates underlying the whole superstructure of debt have started to shift.

On the surface nothing remarkable is happening – the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread – a form of insurance contract against issuer default – has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27 – see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets.

Here's where it gets really scary:

"This has perplexed, and even amused, some market observers. How, they ask, could a private sector contract against default be expected to pay out in the case of a US government default – which would be the equivalent of a nuclear explosion in the financial markets? So what’s the point of buying such a contract?

Moreover, how could the US government ever renege on its debts? After all, it supplies the world’s reserve currency, and the Federal Reserve Chairman reminded us a few years ago of the US authorities’ ability to print money in unlimited quantities. Any “default” would at least be through the time-tested mechanism of inflation and currency devaluation, according to this view." "

I can't see this happening. But then:

"When measured as a percentage of GDP, the US national debt is expected to pass 70% next year, which, though much higher than recent years, is still short of the record 122% registered in 1946, at the end of the Second World War. Some observers point to this comparison as an argument for the sustainability of the current position.

Yet others argue that government debt must be seen in the context of, and as part of, the overall debt burden on the economy. With the US private debt to GDP ratio at levels never seen before – close to 300%, according to Steve Keen, the Australian economist – the question is surely whether the whole debt pyramid can avoid crashing down via a violent and uncontrollable chain of defaults, dragging the government bond market down with it. If this seems far-fetched, it helps to remember that the Latin root of the word credit comes from credere – to believe, but also to trust. For large sections of the private sector bond market, it is precisely that trust which has disappeared over the last year and a half. To suggest that such “credit revulsion”, to use an old term, might spread to governments’ debt obligations is surely not beyond the realms of possibility.

Again, I don't see any of this happening. Some of the comments give good reasons why. But how would we ever know until it happened? I don't know.