RATINGS AGENCY Standard Poor’s issued Belgium an ultimatum yesterday – form a government within six months or face the threat of a downgrade.

The message, likely to increase market speculation that Belgium could end up following Greece and Ireland towards an international bailout, may be the jolt Belgian politicians need to form a government half a year after an election.

Political paralysis in the linguistically divided country of 10.6 million people has long been seen as harmful to efforts to reduce Belgium’s budget deficit and debt almost equal to its annual output.

The country had stayed in the wings as Europe’s debt crisis spread over the past year, but that has changed in recent weeks as fears have grown that contagion will spread from Greece and Ireland to Portugal and Spain, and then to Italy and Belgium.

Any hopes it could remain out of the spotlight were dispelled for Belgium yesterday.

Markets are already demanding a higher risk premium to hold Belgian debt, with the spread on Belgian 10-year government bonds over benchmark German bunds widening by 10 basis points to 110 points after SP’s move. It had already widened substantially as concerns about contagion grew.

A day after the International Monetary Fund told Belgium it needed to produce a strong deficit-cutting plan soon, SP’s lowering of Brussels’s outlook to negative from stable, with the threat of a downgrade soon, could not be a clearer warning. SP rates Belgium AA+, just below the highest AAA grade.

Belgium can argue that its economy is growing at a faster rate and its deficits are forecast to be lower than the euro zone average this year. Household savings are also high, and the country is a net exporter.

Yet negative sentiment alone can drive financial markets. At nearly 100 per cent of gross domestic product, Belgium’s public sector debt was the third highest in the EU last year, behind only Greece and Italy. – (Reuters)