Belgium: Political leaders reach consensus on budget plan after credit rating cut
November 23, 2011
After tense negotiations and following the decision to cut the country's credit raiting by agency Standard & Poor's, socialist Elio di Rupo ? the politician poised to form a new government ? and leaders of six political parties finally reached a deal that includes EUR 11.3 billion of savings and new taxes aimed at reducing the budget deficit from a projected 3.6% of GDP this year to 2.8% of GDP in 2012. The agreement paves the way for the formation of the new government. The political deadlock and lack of negotiation in recent days had coincided with the deepening of the Eurozone debt crisis and followed a bailout deal between France and Belgium on the jointly-owned Dexia bank, which drove yields on 10-year Belgian bonds to a new record-high of 5.80% during the 25 November trading session. Consequently, international credit agency Standard & Poor's lowered the country's credit rating from AA+ to AA on the same day, arguing that weak economic growth and political instability will make it difficult to reduce the country's public debt. The move represented the first downgrade for Belgium in 13 years. The European Commission expects that Belgium will miss the budget deficit target of 2.8% of GDP next year and forecasts that the country's budget shortfall will widen from an estimated 3.0% of GDP in 2011 to 4.6% of GDP in 2012.
Author: Ricardo Aceves, Senior Economist