The king of Belgium on Monday asked the country's caretaker government to move ahead with public spending cuts, as concerns over Belgium's debt levels and a political crisis sent its bond prices tumbling.
The call came as 10-year debt yields rose 12 basis points to 4.24 per cent, an indication of investors' growing nervousness at financing Belgium's sovereign debt. Belgium now pays a 1.4 percentage point premium, or spread, over benchmark German paper, the highest since January 2009.
The spreads are the highest in the eurozone outside the "periphery" countries such as Greece and Ireland, which have received European Union-led bail-outs; and Portugal, where such a move is being discussed in national capitals.
Investors are demanding a premium following the political instability in the divided country: Belgium has been without a permanent government since April, when a fragile coalition collapsed over tensions splitting the Dutch-speaking and Francophone communities.
The stalemate, which continued after June elections, means Belgium has not moved ahead with any fiscal consolidation measures, despite having the third highest debt-to-gross domestic product in the European Union behind Italy and Greece.
In December, credit rating agency Standard & Poor's cut its outlook for Belgian debt, citing the political stalemate.
Albert II, whose political role is usually limited, issued a statement after meeting Yves Leterme, the caretaker prime minister
"The 2011 budget balance should be better than what's agreed with the European institutions," the royal palace said in a statement.
Belgium's debt is about equal to its GDP. A new government is expected to trim €25bn in spending before 2015, though with no indication yet where the cuts might come. EU rules impose a long-term deficit ceiling of 3 per cent, against the 4.8 per cent forecast for Belgium in 2010, and 4.6 per cent in 2011.
Brighter news is expected on Wednesday when Mr Leterme will publish an annual economic report with a 2010 deficit below the forecast 4.8 per cent, according to two government sources.
The royal order came after talks to forge a coalition collapsed late last week, leaving few obvious political options in the crisis. New consultations to broker an agreement between the dozen parties represented in parliament could start as early as tomorrow. Another stalemate could result in fresh elections.
"It's a strong signal to financial markets," said Philippe Ledent, a Brussels-based economist at ING. "We are entering the period where the political crisis can cause real damage. For the moment the Belgian fundamentals are quite good, but we cannot continue without a government."
The rise in debt yields caused financial stocks to fall. KBC and Ageas -- the insurance group previously known as Fortis -- both fell 7 per cent, and Dexia, the Franco-Belgian financial group, was down 3 per cent.
MY SUMMMARY:
Belgium now pays a 1.4 percentage point premium, or spread, over benchmark German paper, the highest since January 2009.
In December, credit rating agency Standard & Poor's cut its outlook for Belgian debt, citing the political stalemate. The rise in debt yields caused financial stocks to fall.
http://edition.cnn.com/2011/BUSINESS/01/10/belgian.debt.ft/index.html
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