S&P in warning to Belgium on deficit

RATINGS agency Standard & Poor’s (S&P) warned Belgium yesterday it faced being downgraded if it failed to form a government within the next six months lowering its outlook to negative from stable.

The warning came a day after the International Monetary Fund (IMF) told Belgium it needed to produce a strong deficit reduction plan soon.

The warning from S&P is likely to fuel market speculation that Belgium could follow Greece and Ireland in needing an international bailout. The country has the third highest debt to GDP ratio in the European Union and has been without a government for six months following elections in June. The elections gave victory to the separatist N-VA party but it has been unable to create a working coalition.

The political paralysis has led financial markets to demand a higher risk premium to hold Belgian debt, with the spread on Belgian 10-year government bonds over benchmark German bunds widening 10 basis points to 110 points on S&P’s warning yesterday.