By Sebastian Moffett
BRUSSELS (Reuters) - Belgium's political deadlock sparked a downgrade in its debt on Friday, possibly forcing the country to pay higher interest rates as it nears 18 months without a formal government.
Standard & Poor's downgraded Belgium's credit rating to double-A from double-A-plus, citing concerns about funding and market pressures, as the euro zone debt crisis continues to worsen.
"We need a reply that is clear and credible if we are to avoid the worst," Belgium's caretaker prime minister, Yves Leterme, told Belgian television immediately after S&P's announcement.
The downgrade followed difficulties this week in Belgium's drawn-out attempt to form a government. Elio Di Rupo, leader of the French-speaking Socialists, had been trying to form a government based on a six-party coalition.
But he tendered his resignation on Monday after talks for a 2012 budget - agreement on which is a condition for forming a government - ground to a halt.
"The announcement by Standard & Poor's reinforces further the necessity to finalize the 2012 budget in a very brief period," Finance Minister Didier Reynders said in a statement.
Economists said that the downgrade might force the political parties to forge an agreement over the weekend, but that this would still be too late for the country to avoid higher borrowing costs.
"Even if they have an agreement tonight we will have to pay higher interest rates due to the lower rating," said Philippe Ledent, an economist at Bank Degroof.
In its statement, S&P said: "We think the Belgian government's capacity to prevent an increase in general government debt, which we consider to be already at high levels, is being constrained by rapid private sector deleveraging both in Belgium and among many of Belgium's key trading partners."
Barclays Capital economist Francois Cabau pointed out that Belgium had been on a negative outlook for a year, so the announcement was not big news.
"I guess they saw enough in terms of the political uncertainty," he said.
Reynders said that Belgium's credit rating was still one of the most solid in Europe, and that its heavy debt burden was already heading downwards.
Though Belgium's outstanding debt is nearly as big as its gross domestic product, making it one of the most indebted countries in Europe, the country's budget deficit is forecast to be relatively low this year at 3.6 percent.
The six parties involved in the budget talks are aiming at a budget deficit of 2.8 percent of GDP for next year, but have failed to agree how much of the savings should come from higher taxes and how much from public spending cuts.
The budget wrangling and a wider loss of confidence in European sovereign debt have pushed up Belgium's borrowing costs sharply. At the end of September, the yield on benchmark 10-year government bonds was under 3.9 percent. On Friday, it was up to 5.9 percent.
Belgium's downgrade followed another rough week in European sovereign debt markets. Italy paid a record 6.5 percent to borrow money over six months on Friday, raising the pressure on Rome's new emergency government.
The S&P announcement is a sign of "further deterioration across the euro zone," said Mark Luschini, chief market strategist in Janney Montgomery Scott in Philadelphia. "The threat is creeping closer to the core member. It's evident that their situation is untenable."
(Reporting By Sebastian Moffett. Additional reporting by Alexandria Sage in Paris and Richard Leong in New York. Editing by Jan Strupczewski and Kenneth Barry)