The country has been limping along with caretaker ministers since Flemish separatists emerged as the biggest party in June. Talks have broken down over the scale of subsidies to the poorer French-speaking areas, making Belgium a microcosm of EMU's North-South divide.
It is unclear whether the political system can muster the discipline of the early 1990s when Belgium came back from the brink of a debt compound spiral with an impressive fiscal squeeze.
"We believe Belgium's prolonged domestic political uncertainty poses risks," said S&P. "Belgium's current caretaker government may be ill-equipped to respond to shocks to public finances. If Belgium fails to form a government soon, a downgrade could occur, potentially within six months."
Spain also faced fresh debt woes at an auction on Tuesday. The yield on €2bn (£1.7bn) of one-year bills jumped to 3.4pc, up 100 basis points in a month. "It was pretty dire," said David Owen from Jefferies Fixed Income.
Mr Owen said the surge in yields on US Treasuries is causing the cost of capital to jump across the global system, including Spain. "This is raising the bar for everybody," he said.
While Spain can still borrow at a manageable cost, it is storing up rollover risk by issuing debt at short maturities. The IMF said Spain must refinance €220bn this year. Moody's this week raised its estimate of Spanish bank losses to €176bn, up from €108bn a year ago.
Jean-Claude Trichet, head of the European Central Bank (ECB), said a "quasi-fiscal union" may now be required to stabilise the eurozone's debt markets, adding the EU's €440bn rescue fund should be deployed with "maximum flexibility", and beefed up in "quantity and quality".
Mr Trichet hopes to prod political leaders into authorising use of the fund for pre-emptive purchases of bonds, perhaps from Spain, relieving the ECB of its lonely burden. The ECB has been stuck with the task of propping up the banks and debt markets of peripheral Europe, conducting a fiscal rescue without a legal mandate and on slender resources.
Officials are mulling plans to raise the ECB's capital to cope growing liabilities, which means asking member states to provide fresh money. Its capital base is just €5.8bn, compared with the US Federal Reserve's $57bn (£36bn).
Toby Nangle, from Baring Asset Management, said the ECB may already be insolvent under strict accounting rules. "Could the international financial system cope with a bankrupt ECB? The fact that it is not easy to dismiss this out of hand is cause for great concern," he said.
The agenda for this week's EU summit shows that the EU plans to slipping through the creation of its new permanent rescue fund from 2013 without the need for a fresh treaty, using the "simplified revision procedure" of Article 48.
"We always feared the EU would stretch this clause to ratchet up their powers," said Mats Persson from Open Europe. "Article 48 can be used only if it does not expand the powers of the EU, but the crisis mechanism clearly does because it allows the Commission to make key decisions about the future of countries in trouble."
The IMF said Belgium does not have the luxury of cutting its budget deficit slowly, tightening to 4pc of GDP this year instead of 4.7pc to send a "strong signal" to markets.
Belgium has an oversized banking system with assets equal to 340pc of GDP and big state guarantees. Belgian banks, led by Dexia and KBC, have $54bn of exposure to Ireland alone, according to the Bank for International Settlements.
Belgium has a current account surplus and large private savings. However, the IMF said suffered a big erosion of labour competitiveness against Germany since 2000, and now faces a major aging shock.
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