BRUSSELS (Reuters) - Belgium's King Albert is due to reveal his next step in the coming week aimed at ending a long political deadlock that has deepened market fears about the country's high public debt and a lack of additional budget cuts.
No obvious solution is open to the king. New elections would probably fail to break the stalemate and the political will is lacking to form an emergency government which might impose savings that the current caretaker administration cannot make.
Hopes of forming a new government seven months after national elections dived last Thursday after a mediator tasked with restarting talks between Dutch-speaking and French-speaking parties handed in his resignation to the palace.
The country's cost of borrowing, as measured by the gap between yields on Belgian bonds and benchmark German bunds, increased on the news, fuelling fears that the market would view it as one of the more vulnerable members of the euro zone.
Belgium may belong on a risk list of euro zone countries following debt crises which have already afflicted Greece, Ireland and Portugal, while Spain also remains vulnerable.
POTENTIALLY AT RISK
"Belgium is one of the countries that's on the radar, it certainly has problems on both the political front and the debt front. It probably should be categorised just after Italy as a country that is potentially at risk," Everett Brown, European bond strategist at IDEAglobal told Reuters.
Analysts say Belgium's economy is much more competitive than those of Greece, Portugal and Spain. But the central bank forecast recently that without extra measures the public debt would rise to 99.8 percent of economic output from 97.6 percent.
EU finance ministers have given Belgium until the end of 2012 to cut its budget deficit below the bloc's cap of 3 percent of gross domestic product from this year's target of 4.8 percent under the bloc's fiscal discipline procedure.
Mediator Johan Vande Lanotte will visit the palace again on Monday to see whether the King will accept his resignation, after which it is the King's turn to announce his next step.
"I think the King will have to listen carefully to the people in Rue de la Loi (the seat of the Belgian parliament) which will buy some time. From there on we could see a new initiative being born," said Carl Devos, professor of political science at Ghent University.
The caretaker government of Prime Minister Yves Leterme is running day-to-day affairs but has no mandate to start additional savings measures that would ease market jitters.
Current Finance Minister Didier Reynders wants the interim government to ask parliament to support a limited programme of budget cuts, an idea also put forward by Leterme last month.
"The problem with this is that the interim government is based on an old majority in parliament," said Peter Vanden Houte, Chief Economist at ING Belgium, adding that it may not win the necessary support in the new parliament composed on the basis of the June 2010 elections.
Political will to form any kind of emergency government is also small: "After four years of standstill there is a need for a strong government that tackles not only the constitutional reform but also the socio-economic challenges," Caroline Gennez, who leads the Flemish social democrats, told Belga news agency.
(Reporting by Robert-Jan Bartunek in Brussels, additional reporting by Jessica Mortimer in London; Editing by David Stamp)
