Belgium gets debt warning over political impasse

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Debt ratings agency Standard & Poor's warned Belgium on Tuesday that it could cut the country's credit score within six months if feuding politicians failed to form a government soon.

The threat upped the ante for Flemish and French-speaking parties to finally reach an agreement six months after June 13 elections gave a victory to nationalists in the wealthier Flanders region.

The kingdom's borrowing costs rose 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.

S&P kept Belgium's long-term debt rating at AA plus and the short-term score at A-1 plus thanks to a better-than-anticipated fiscal standing in 2010, but it lowered the outlook from stable to negative due to the political deadlock.

"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.

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

Sovereign debt ratings from S&P and the world's two other leading ratings agencies, Moody's and Fitch, have a direct influence on the interest rate demanded by investors to buy government bonds.

"We could lower the sovereign rating on Belgium one notch if we conclude that the lack of consensus will result in the government not being able to stabilise its debt trajectory and to move forward on reforms designed to improve political cohesion," S&P said in a statement.

"If Belgium fails to form a government soon, a downgrade could occur, potentially within six months," it added..

S&P warned that the current caretaker government of Prime Minister Yves Leterme "may be ill-equipped to respond to shocks to public finances."

The interest rate on 10-year Belgian bonds rose above four percent on Tuesday, a slight increase from the previous day.

"There is no reason to panic," Leterme told RTBF radio.

Flemish nationalist leader Bart De Wever sparked a new war of words with his francophone rivals after calling Belgium "the sick man of Europe" and a failed state with no future in a German magazine article published Monday.

Erik de Vrijer, head of an IMF delegation that reviewed the Belgian economy, said the country's fundamentals were "good" although he warned that they need to be "reinforced."

Last week the Belgian central bank revised 2010 growth forecasts upwards to 2.1 percent from 1.3 percent previously.

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.

"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.

Belgium wants to bring down the deficit to 4.1 percent of GDP next year, three percent in 2012, and break even in 2015. It needs to find up to 22 billion euros in savings to reach its targets.

The country's debt level could also cross the psychological mark of 100 percent of GDP next year, the European Commission said.

© 2010 AFP

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