Belgium's credit rating cut as Italian bond rates soar

Belgium's credit rating was downgraded yesterday amid fears of European recession and continued failure by the Low Countries nation to agree a settled government.

Standard & Poor's lowered Belgium's rating from AA+ to AA, which prompted politicians to resume talks on next year's budget, which, it is hoped, will reduce high debt and deficit levels.

The credit agency cited "protracted political uncertainty" as a risk to Belgium's creditworthiness. The country has lacked a permanent government for more than 530 days and the agency said the caretaker administration "lacks a mandate to implement deeper fiscal and structural reforms". The country's yields on long-term bonds are closing in on 6 per cent, not far short of the 7 per cent that has pushed other European nations into international bailouts.

The downgrade came as Italy paid a record 6.5 per cent to borrow money over six months and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome's new emergency government.

The auction yield on the six-month paper almost doubled compared with a month earlier. Although Italy managed to raise the full planned amount of €10bn (£8.6bn), weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market. Yields on two-year Italian bonds soared to more than 8 per cent in response, a euro lifetime high. It now costs more to borrow for two years than 10 on the secondary market.