* Fitch cuts outlook for Belgium to negative from stable
* Means cut more likely than not in next 1 to 2 years
* Belgium political deadlock has lasted more than 11 months
* Fitch says Belgium needs new government for reforms
(Adds details, background) By Walter Brandimate and Philip Blenkinsop
NEW YORK/BRUSSELS, May 23 (Reuters) - Fitch became the second ratings agency to threaten Belgium with a credit downgrade on Monday, saying a lack of government undermined budget efforts in one of the euro zone’s most indebted states.
Fitch affirmed its AA+ rating for Belgian government debt, but said its outlook was now negative rather than stable, mirroring Standard & Poor’s warning from last December. [ID:nLDE6BD17S]
“The negative outlook reflects Fitch’s concerns over the pace of structural reform in the coming years and the ability to accelerate fiscal consolidation without a resolution to the constitutional crisis,” Douglas Renwick, a director in Fitch’s sovereign group said in a statement.
Fitch’s warning means that, without effective action in Belgium, it is more likely than not to cut Belgium’s credit rating within one to two years.
Financial markets were already unsettled on Monday [ID:nLDE74M0V7] after S&P cut its outlook on Italy to negative [ID:nLDE74L0K5] and Spain’s ruling Socialists were wiped out in weekend regional and municipal elections. [ID:nLDE74M02A]
Belgium sold 3.4 billion euros of bonds with relative ease on Monday [ID:nLDE74M0Z8] and Fitch said it still had many characteristics of a stronger ‘core’ euro zone member. However, its high debt and lack of government were causes for concern.
Belgium’s public sector debt totaled 96.6 percent of annual output last year, putting it behind only Greece and Italy in the euro zone and on a par with bailout recipient Ireland.
The country has also been without a fully fledged government for more than 11 months since a parliamentary election last June, with rival Dutch- and French-speaking parties arguing about the extent to which powers should be devolved.
“Political risk is higher in Belgium than in other euro area peers given the fractious disputes over the future shape of the country,” Fitch said.
The debt and political crisis disturbed financial markets at the turn of the year, but they appear more settled now even though there is no sign of an end to the political deadlock.
The caretaker government of Yves Leterme has tightened the proposed budget deficit for this year to 3.6 percent of GDP from 4.1 percent in 2010, among the lowest levels in the single currency bloc.
Fitch took note of this positive development, but said that sustained debt reduction required fiscal reform and discipline over the coming years, which in turn required a new government with a fresh mandate.
The ratings agency said Belgium’s high debt left the government with little capacity to deal with future shocks.
“This makes the rating sensitive to risks surrounding the government’s medium-term fiscal objectives, which Fitch views as significant. Slippage from official deficit targets would likely result in a downgrade,” Fitch said.
The agency said a rigid labour market and significant product market regulation were factors limiting Belgium growth.
The bailed out banking sector had relatively low risk domestic exposures, but claims on peripheral euro zone and eastern European entities were “significant”, Fitch said.
Standard & Poor’s put the core groups of Belgian banking group Dexia (DEXI.BR) on CreditWatch negative on Monday because of exposure to Greece. [ID:nWNA9228]
Moody’s rates Belgium at Aa1, equivalent to Fitch’s and S&P’s AA-plus.