Belgium may have a government next week, the country's chief negotiator in charge of forming a cabinet Elio Di Rupo said on Sunday, after political parties clinched a deal on the 2012 budget under pressure from rising borrowing costs.
The budget agreement was seen as the last major obstacle to forming a government among six Belgian parties and came hours after ratings agency Standard & Poor's had downgraded Belgium's credit to AA from AA+, pressing the country to act.
We hope to be able to do it (form a government) during next week. We still have a few areas on which we need to work and we believe that we will do it with the shortest delay possible, Elio Di Rupo, who is likely to be the next prime minister, told a news conference.
We still need a few days to finish talks in some areas. Despite the enormous institutional work, structural reforms and the budget, there are still some other areas of life that we need to deal with, and after that every political formation has its own delay, so we will go as fast as possible, he said.
Belgium has set a modern-day record for being without a formal government. It has been about a year and a half since elections were held last June and the lack of a government at a time of bond market turmoil was one of the reasons Belgium was downgraded.
There was a desire to do what was required to have a budget. It is there, and it's now only administrative questions and then the parliamentary debate and we hope to have a government in the next few days, Di Rupo said.
The wrangling over the 2012 budget and a wider loss of confidence in European sovereign debt have pushed up Belgium's borrowing costs sharply.
At the end of September, the yield on benchmark 10-year government bonds was less than 3.9 percent. On Friday, it was up to 5.9 percent.
Belgium will auction between one and two billion euros worth of bonds on Monday and economists expect it will have to pay more to borrow after the rating downgrade, which followed another rough week in European sovereign debt markets.
Italy paid a record 6.5 percent to borrow money over six months on Friday, piling pressure on Rome's new emergency government.
The 2012 Belgian budget deal will not only help the country in the eyes of investors, but also help it avoid European Union disciplinary action for those who do not meet agreed deficit reduction targets.
Belgium aims to reduce its budget deficit to 2.8 percent of gross domestic product in 2012 from 3.6 percent expected this year and balance its books in 2015 - in line with what it had promised EU finance ministers.
To ensure long term debt sustainability, the country will also reform its employment and pensions regulations, which will help bring down public debt from 97.2 percent of gross domestic product expected this year.
The legal retirement age will not be raised from the current 65 years, but the minimum age for early retirement will be raised to 62 by 2016.
Belgium's controversial wage indexation policy will remain in place, but it will revise its policy, much criticised by the Flemish-speaking part of the country, of giving unemployed people a percentage of their former salary indefinitely.
Under the new austerity budget, Belgium will cut benefit payouts in phases for the longer-term unemployed.
(Reporting By Ben Deighton, Writing by Jan Strupczewski; Editing by Louise Ireland and Andrew Heavens)