Belgium Reaches Budget Deal After Credit Rating Cut by S&P

Belgium’s political factions reached a deal to reduce the leaderless country’s budget deficit, bringing it closer to forming a government after 531 days of post-election brinksmanship.

Elio Di Rupo, president of the French-speaking Socialist Party who has led coalition negotiations between six of the country’s political parties, thrashed out the accord after all-night talks. King Albert II today asked him to form a government after tensions between the Dutch-speaking north and French-speaking south fueled speculation the country could break up.

Belgium’s rating was yesterday cut one step to AA by S&P, which said the cost of bailing out Dexia SA, a lack of policy consensus and slowing growth will make it difficult to reduce the euro region’s fifth-highest debt load. Caretaker Prime Minister Yves Leterme had called for a deal between the six parties involved before Nov. 28, when Belgium plans to raise as much as 2 billion euros ($2.7 billion) from a bond offering.

“It’s the markets that made them finally wake up,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, said in a phone interview. “It’s good that the markets did this, because no one else managed to convince them -- not the electorate.” The “main stumbling block to forming a government” has now been removed, he said.

Sanctions Threat

Belgium faced sanctions from the European Union for failing to tackle the shortfall in its public finances. EU Economic and Monetary Affairs Commissioner Olli Rehn reiterated last week that Belgium must take action to meet that goal.

Central bank governor Luc Coene today urged euro-member governments to take action to restore financial markets’ confidence in the public finances. After that, the European Central Bank and its Belgian counterpart can take steps to restore the functioning of government bond-markets, he told Het Belang Van Limburg.

“This budget meets the multi-year commitments of Belgium towards the European Union,” the negotiators said in a joint statement on the deal. “It will reduce the deficit in our country to 2.8 percent of GDP in 2012 to break even in 2015.”

The deal, which includes 11.3 billion euros of savings and new taxes, “brilliantly passes the European test,” Alexander De Croo, the leader of the Flemish Liberal party, was quoted as saying by the Belga news agency.

‘Compromise Budget’

“It’s a compromise budget,” Laurette Onkelinx, a French-speaking socialist lawmaker, told Belga. “We tried to have a budget satisfying each other, but there would be no agreement if everyone did not have water in his wine.”

Three days ago, King Albert turned down Di Rupo’s request to stand down from leading the negotiations and urged the six parties to complete the discussions and form a government.

The King is “pleased that agreement has been reached” on the budget, the royal palace said in an e-mailed statement. “Accordingly, he has instructed” Di Rupo “to form a government as quickly as possible.” Di Rupo, 60, had sought to quit after the Liberals from both sides of Belgium’s linguistic divide refused to accept his earlier plans for a 2012 budget.

The country’s rating was lowered from AA+, with a negative outlook, London-based S&P said yesterday in a statement. The action by S&P is the first downgrade for Belgium in almost 13 years and puts its credit ranking on a par with the S&P local-currency ratings of the Czech Republic, Kuwait and Chile.

Borrowing Costs Jump

Belgium’s borrowing costs have surged to the highest in 11 years in the past two months after the nation’s government agreed to buy Dexia’s Belgian bank unit and guarantee part of the crisis-hit lender’s liabilities for 10 years. Investors continued a selloff in Belgian bonds after six-party coalition talks ran aground this week as Liberals and Socialists clashed over how to cut the budget deficit.

Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece in having its credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings.

Belgium’s budget deficit will narrow to about 3.6 percent of gross domestic product this year from 4.1 percent in 2010, S&P said. It also forecast government debt will increase to about 97 percent of GDP from 96.1 percent last year after the administration paid 4 billion euros to nationalize Dexia Bank Belgium NV.

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