Belgium faces S&P downgrade

 

Belgium's failure to form a government since elections in June threatens its ability to manage its debt and could lead to a downgrade of its sovereign rating within six months, Standard & Poor's said today.

The strong warning to Belgium, which has a debt-to-GDP level of about 100 per cent, places it firmly in the category of riskier states in the euro zone debt crisis, with Greece and Ireland already receiving EU help and Portugal and Spain threatened.

Standard & Poor's said it had concerns about Belgium's general fiscal outlook, its ability to bring its budget deficit down to a target of 4.1 per cent next year, and the government's gross borrowing requirement of around 11 per cent of GDP.

"We believe that Belgium's prolonged domestic political uncertainty poses risks to its government's credit standing, especially given the difficult market conditions many euro zone governments are facing," S&P said in a statement.

"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.

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

The statement followed an announcement that S&P had lowered the outlook for Belgium to 'negative', while maintaining its rating at AA+/A-1+.

Belgium has been without a government since June, when a parliamentary election failed to produce a clear winner. Six months of negotiations over forming a coalition government have failed to clinch an agreement. There is now the possibility of a new election being held, if negotiations do not succeed.

Belgium has largely escaped the pressures that have been brought to bear on bond markets in Greece, Ireland, Portugal and Spain, although in recent weeks yields on 10-year benchmark bonds have risen, with the spread over German bunds widening.

The International Monetary Fund said on Monday Belgium needed to quickly articulate a plan to reduce its budget deficit to prevent debt market concerns from undermining its economic recovery.

Belgium's real gross domestic product is expected to grow 1.7 per cent in 2011 versus about 2 per cent in 2010 - a rate driven by strong exports and inventory rebuilding.

"The outlook is uncertain and risks are predominantly on the downside," the IMF said.

"Financial market concerns about sovereign risks in the euro area, Belgium's high public debt and political uncertainty could dampen confidence, increase financing costs for the economy, and undermine the recovery," the IMF said.

The IMF said Belgium needed to develop and communicate a comprehensive strategy to reduce its budget deficit to 3 per cent of gross domestic product by 2012 from 4.8 per cent in 2010.

Reuters