Belgium secures government after record deadlock

on December 05 2011 5:24 PM

Belgium finally secured a government on Monday after record-long talks to form a coalition that promises the most profound state reform in decades and a commitment to restore the country's finances.

The new six-party coalition has a mammoth 180-page deal to enact having already lost a year and a half of a four-year term.

The government must satisfy demands of the Dutch-speaking Flemish majority for devolution of further powers to Belgium's regions, and may have to redraw a budget that economists say is based on too optimistic a growth forecast.

That will be no easy matter. Budget talks themselves dragged on for six weeks and only concluded at the end of an 18-hour session after Standard & Poor's had cut Belgium's credit rating to AA from AA+.

The new government will be headed by French-speaking Socialist leader Elio Di Rupo. It retained many of the ministers from the caretaker government of acting prime minister Yves Leterme, albeit in different roles.

Flemish Christian Democrat Steven Vanackere becomes finance minister and francophone Liberal Didier Reynders foreign minister, a straight job switch. The cabinet will be sworn in on Tuesday afternoon, the palace said.

Di Rupo will be the first native French-speaking prime minister of Belgium since 1979 and the first from the region of Wallonia since 1974, as well as the first son of immigrants and the first openly gay person to be premier of the country.

The more right-leaning Flemish electorate has already expressed concern about being led by a French-speaking Socialist -- and what is more one whose command of Dutch is limited.

FLEMISH SCEPTICISM, BUDGET RISK

A poll in Le Soir showed just 29 percent of Flemish people have confidence in Di Rupo, although his support in French-speaking Wallonia was 69 percent.

N-VA, a party that wants Flanders to break free from Belgium, has 35 percent of support among Flemish voters.

Talks including N-VA were deadlocked for months, prompting speculation that 181-year-old Belgium could break apart.

The N-VA's eventual exit opened the door for a deal resolving electoral boundaries around the capital Brussels, devolution of more powers to the regions and financial transfers, issues over which Belgium's linguistic groups have argued for years.

Belgium also has a budget battle on its hands and might be forced to toughen austerity measures that already drew 50,000 protesters onto the streets last Friday.

Belgium has found itself in an uncomfortable middle ground between triple-A rated euro zone countries and those at the periphery of the single currency bloc whose sovereign debt has been sharply sold off since the start of last year.

Belgium's public sector debt totalled 96 percent of gross domestic product last year, putting it behind only Greece and Italy in the euro zone and on a par with Ireland.

It has also been saddled with providing the bulk of state guarantees to bailed out Franco-Belgian financial group Dexia.

Belgian 10-year yields shot up to almost 6 percent at the end of October, just below the level that prompted bailouts in fellow euro zone members, with a spread over German bunds, a sign of the perceived risk, of 3.72 percentage points.

Belgian yields have fallen sharply since then, and by far more than among euro zone peers, to below 4.4 percent for 10-year debt, with a spread now tighter than 220 basis points.

Despite the formation of a government and a deal to bring the deficit below the EU limit of 3 percent next year, risks remain. Many economists say Belgium is unlikely to achieve the 0.8 percent economic growth on which the budget is based.

Standard & Poor's, when downgrading Belgium at the end of November, said there was an increased likelihood that Belgium's financial sector would need further support and that this was likely to weigh on the already swollen public sector debt.

It added that political uncertainty was undermining Belgium's creditworthiness.

(Reporting By Philip Blenkinsop)

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