Ratings giant hits Belgium as crisis lashes euro heart

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Ratings giant Standard and Poor's hit Belgium with a humiliating downgrade Friday, forcing its outgoing premier to issue a 48-hour deadline to end a world-record political crisis before markets re-open.

The decision underlined a sharp escalation of the debt crisis in a week when Germany struggled to raise finance and concern grew that the euro currency was close to breaking-point in the absence of radical pan-eurozone action.

"The ability of authorities to respond to potential economic pressures from inside and outside of Belgium... in our opinion is constrained by the repeated failure of attempts to form a new government," an S&P statement said.

After Greek, Portuguese and Irish bailouts, and with Italy, Spain and even France in the firing line, it meant more bad news for leaders struggling in the absence of a European Central Bank decision to mount a gigantic financial rescue.

As a founding member of the European Union, the credit rating downgrade by one notch to AA served as a wake-up call for Belgium after 19 months in limbo and a generation of in-fighting across a Flemish-French divide that threatens to break the country in two.

Yves Leterme, who has been stuck in the role of caretaker prime minister for more than 500 days, did not attempt to hide the "bad news" and immediately gave Belgium's feuding politicians until Sunday night to conclude an agreement.

His ultimatum was handed down days after Leterme's expected successor Elio Di Rupo offered his resignation to Belgium's king in frustration at a failure of six-party talks to agree a deficit-cutting 2012 budget to avoid EU sanctions. Albert II rejected the resignation and sent him back to work.

The European Commission has repeatedly warned that Belgium must bring its public deficit below 3.0 percent of GDP by 2012 -- rather than the 4.6 percent forecast failing action -- or face a fine of some half a billion euros.

"It is blindingly obvious, we have to send a very clear signal... preferably before the markets open," Leterme said in a live national television interview, referring to a budget deal and final agreement on a cabinet to take over.

Ratings agencies have long warned Belgium that its political soap opera could impact the credit score of a country whose debt is almost as big as its annual national output.

The news came as Socialist Di Rupo led a new round of talks among Flemish and Francophone parties struggling to make its sums add up.

The parties cannot agree how to trim 11.3 billion euros off the deficit next year and some 20 billion in all by 2015 -- centre-right parties urging Di Rupo to cut social welfare benefits and state spending rather than raising taxes.

Leterme's finance minister, Didier Reynders, blamed the downgrade on a "global loss of confidence" in eurozone public finances and insisted that Belgium's creditworthiness remained "one of the strongest in Europe."

But analysts who had expected the S&P decision, two weeks from a crunch summit in Brussels of EU leaders toiling badly to convince markets they are not falling into a bottomless pit, said the news also had wider significance.

"Belgium is the symbolic buffer between the eurozone periphery and its core, so this is a sign that the crisis -- slowly, but surely -- is striking at the heart of Europe," Sony Kapoor, head of the Re-Define think tank, told AFP.

"It might be a peculiar case because of the divisions between its peoples," he said, "but forget the politics -- it is not the only core country with problematic banks, and that's the key here."

S&P cited risks of setbacks in efforts to cut the public deficit "stemming from an increasing likelihood we see that economic growth will slow, given the deleveraging of the European financial sector."

Market turmoil also raises "the likelihood that Belgium's financial sector will require more sovereign support," the agency said, noting that a bailout of Dexia bank had largely cancelled out progress on cutting the deficit this year.

© 2011 AFP

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