By Philip Blenkinsop
BRUSSELS (Reuters) - Belgium's caretaker government committed on Wednesday to pull its budget deficit below 4 percent of annual output this year in an urgent effort to reassure markets, and said it could outline cuts next month.
Belgium's debt of nearly 100 percent of gross domestic product (GDP) and lack of new government for seven months has left investors wondering whether it could follow Greece and Ireland into a financing crisis.
The premium investors demand to hold 10-year Belgian government debt compared with the German benchmark has neared the euro lifetime high of 149 basis points in the past week, after the latest push to form a government failed.
Yves Leterme, who has stayed prime minister during a record 213 days of post-election deadlock, promised new cuts at the urging of King Albert II, who made an unusual intervention this week to call for a tighter budget.
"In mid-February we will take initiatives that will improve the deficit in such a way that we will exceed the targets agreed with the European Union," Leterme told a news conference to present the 2010 budget figures.
Finance ministry officials said the budget might come into force in March.
David Schnautz, interest rate strategist at Commerzbank in London, said the plan to tighten the 2011 budget was not a game-changer for Belgian government debt. Investors still wanted to see a new government with full powers.
"The market is focussing a lot on the political level and demanding a functioning government that, if things turn for the worst, can really act or react... It's really running out of patience with this gridlock," he said.
He added the prospect of Belgium issuing a new 10-year benchmark, which it has done in January for the past five years, might also be pressuring Belgian paper.
DEBT HIGH, BUT RISING ONLY SLOWLY
Leterme and his ministers acknowledged Belgium's gross debt was the third highest in the euro zone in 2009 and possibly only overtaken by Ireland last year. However, they noted that public sector debt increased by just 1 percentage point last year, the smallest rise of any euro zone member.
"Our situation today is much better than in other countries," Leterme said, after describing the 2010 budget figures as "excellent" albeit still negative.
Belgium's deficit fell to 4.6 percent of gross domestic product (GDP) last year from 6.8 percent in 2009, better than a previous forecast of 4.8 percent.
It had committed to reducing that to 4.1 percent this year, but Albert urged the stand-in government on Monday to go further. Like other European monarchs, the Belgian king traditionally remains outside political and economic debate.
Leterme said Belgium's deficit this year would preferably be below 4 percent. Finance Minister Didier Reynders later told reporters the figure could even be as low as 3.5 percent if Belgium's regions and local communities played their part.
Debt last year, at 97.2 percent, remained below the psychologically significant 100 percent level. The government forecasts it will rise to 98.1 percent this year without the additional measures it intends to take.
The prospects of a government forming looked slightly less bleak late on Tuesday after the king asked a mediator charged with resolving the country's political crisis to return to work, supported by the heads of the two largest parties.
(Additional reporting by Robert-Jan Bartunek; Editing by Jon Boyle)
