Political woes spark downgrade for Belgium

Socialist party’s Elio Di Rupo tendered his resignation after talks for a 2012 budget ground to a halt [Reuters]

Belgium’s political deadlock has sparked a downgrade in its debt, possibly forcing the country to pay higher interest rates as it nears 18 months without a formal government.

Standard & Poor’s downgraded Belgium’s credit rating to double-A from double-A-plus on Friday, citing concerns about funding and market pressures, as the euro zone debt crisis continues to worsen.

“We need a reply that is clear and credible if we are to avoid the worst,” Belgium’s caretaker prime minister, Yves Leterme, told Belgian television immediately after S&P’s announcement.

The downgrade followed difficulties this week in Belgium’s drawn-out attempt to form a government.

Elio Di Rupo, leader of the French-speaking Socialists, had been trying to form a government based on a six-party coalition. But he tendered his resignation on Monday after talks for a 2012 budget – agreement on which is a condition for forming a government – ground to a halt.

“The announcement by Standard & Poor’s reinforces further the necessity to finalise the 2012 budget in a very brief period,” Didier Reynders, the finance minister, said in a statement.

Economists said that the downgrade might force the political parties to forge an agreement over the weekend, but that this would still be too late for the country to avoid higher borrowing tariffs.

“Even if they have an agreement tonight we will have to pay higher interest rates due to the lower rating,” said Philippe Ledent, an economist at Bank Degroof.

Solid, yet indebted

In its statement, S&P said: “We think the Belgian government’s capacity to prevent an increase in general government debt, which we consider to be already at high levels, is being constrained by rapid private sector deleveraging both in Belgium and among many of Belgium’s key trading partners.”

Reynders said that Belgium’s credit rating was still one of the most solid in Europe, and that its heavy debt burden was already heading downwards.

Though Belgium’s outstanding debt is nearly as big as its gross domestic product, making it one of the most indebted countries in Europe, the country’s budget deficit is forecast to be relatively low this year at 3.6 per cent.

The six parties involved in the budget talks are aiming at a budget deficit of 2.8 per cent of GDP for next year, but have failed to agree how much of the savings should come from higher taxes and how much from public spending cuts.

The S&P announcement is a sign of “further deterioration across the euro zone,” said Mark Luschini, chief market strategist in Janney Montgomery Scott in Philadelphia.

“The threat is creeping closer to the core member. It’s evident that their situation is untenable.”