SandP lowers Belgium's outlook on political deadlock

14th December 2010, Comments 0 comments

Debt ratings agency Standard & Poor's lowered its outlook for Belgium to negative on Tuesday, warning that its credit score could drop a notch within six months if it fails to form a government soon.

Although S&P downgraded Belgium's outlook from stable to negative, it kept its long-term debt rating at AA plus and the short-term credit score at A-1 plus because of a better-than-anticipated fiscal standing for 2010.

But the ratings agency warned that it could downgrade the sovereign rating by one notch, "potentially within six months," if Belgium fails to form a government soon.

"We believe that Belgium's prolonged domestic political uncertainty poses risks to its government's credit standing, especially given the difficult market conditions many eurozone governments are facing," said S&P credit analyst Marko Mrsnik.

The country's borrowing costs have risen in recent weeks on the heels of market jitters about the fiscal health of weak eurozone countries following multi-billion-euro bailouts for Greece and Ireland.

Belgium remains without a new government six months after June 13 elections because Flemish and French-speaking parties are deadlocked over giving greater fiscal autonomy to the language-divided country's regions.

"We believe that this prolonged political uncertainty would have been more detrimental to the government's credit standing were it not for Belgium's capable and strong institutions," S&P said in a statement.

The international ratings agency, the most influential along with Moody's and Fitch, warned that the current caretaker government of Prime Minister Yves Leterme "may be ill-equipped to respond to shocks to public finances."

Belgian central bank chief Guy Quaden urged political rivals on December 6 to quickly form a government to allay market fears about its future after yields on the country's bonds peaked the previous week.

"A government is needed quite rapidly but it must be a stable government," he said. "It is difficult to understand overseas how a country can remain without a government for over six months and still continue to function."

But Quaden said the response on markets last week to the Belgian political impasse was both "bizarre" and "more than irrational."

"I cannot see how one could reasonably assimilate (Belgium) with other countries that are facing problems," he said.

Quaden revised upwards growth forecasts to 2.1 percent for 2010, against a June forecast of 1.3 percent, and 1.8 percent for 2011, against a previous estimate of 1.7 percent.

The improved growth, fueled by exports, and the strength of Belgium's institutions are helping the government fall below its 2010 public deficit target of 4.8 percent of gross domestic product, S&P said.

Belgium wants to bring down the deficit to 4.1 percent of GDP next year, three percent in 2012, and break even in 2015.

© 2010 AFP

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