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.
"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.
Belgium sold €3.4 billion of bonds with relative ease on Monday and Fitch said it still had many characteristics of a stronger 'core' eurozone member. However, its high debt and lack of government were causes for concern.
Political risk 'higher in Belgium'
Belgium's public sector debt totalled 96.6% 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 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 eurozone and eastern European entities were "significant", Fitch said.
Italy too big to bail out
Financial markets were already unsettled on Monday after S&P cut its outlook on Italy to negative and Spain's ruling Socialists were wiped out in weekend regional and municipal elections.
The premiums charged by investors to hold Italian and Spanish 10-year bonds rather than safe-haven German bunds rose to their highest levels since January, at 186 and 261 basis points respectively, before easing slightly.
"The key point is that the crisis seems to be taking hold even of peripheral countries regarded as solid," said WestLB rate strategist Michael Leister.
"Sentiment is that there appears to be no end to it now Italy is being scrutinised by the ratings agencies."
Italy, which has the euro zone's biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor's decision on Saturday (21 May) to cut its outlook to "negative" from "stable".
In an explanatory statement, S&P said it did not expect Rome to seek financial help from the EU or IMF due to the "absence of significant imbalances". The sheer size of its public debt effectively made it too big to bail out.
Government sources said Rome would bring forward to next month planned decrees to slice €35 to 40 billion off the budget deficit in 2013 and 2014, in an effort to reassure markets.
"We've kept things in order and the bases are all there for us to continue to do so," Economy Minister Giulio Tremonti said.
Italy's centre-right government lost ground in local elections last week.
(EurActiv with Reuters.)