Delayed Information Leak

A few weeks ago, we published a post entitled 'Nether-Crumble', which discussed the growing economic problems faced by the Netherlands – a member of the euro area's 'core', which is widely perceived as stodgy and financially solid. Nothing could be further from the truth though, as the country is home to one of the largest household debtbergs and real estate bubbles in the world.

The fiscal discipline of its government to date is entirely meaningless in this context, as it will likely be swept away by the bursting bubble. Already a great many mortgage holders are 'underwater', as the fall in home prices has brought the value of their homes below the size of their outstanding mortgage debt. Consequently, the Dutch banking system is now an accident waiting to happen – or rather, an accident that is already happening, albeit seemingly in slow motion.

Now the mainstream press has begun to take notice as well. The Financial Times reported on the Netherlands on May 7 as follows:

 

“Rising personal debt and high unemployment could mean the Netherlands becomes the next casualty of the eurozone crisis, according to Premier Asset Management’s Jake Robbins.

The manager of the £9.4m Premier Global Alpha Growth fund said positive sentiment from European economists and politicians risked overlooking increasingly negative data emanating from countries such as the Netherlands and France.

Mr Robbins said: “Increasingly in the past few months we’ve seen this ‘leap of faith’ that the liquidity supplied by central banks is improving the environment. But if you look at countries like the Netherlands, economic data is deteriorating further. “Most worryingly the Netherlands reminds me of the US in 2006-07 with the amount of debt secured against property when prices are falling.”

The Netherlands is currently mired in the second of two recessions it has experienced in the past four years and its unemployment rate jumped from 7.7 per cent in February to 8.1 per cent in March, the biggest monthly increase since the turn of the century.

Earlier this year the Dutch government was forced to pump €3.7bn (£3.1bn) into the country’s fourth-largest lender, SNS Reaal, after the bank sustained heavy losses from property assets. The country’s coalition government is also trying to force through stringent austerity measures to cut public spending.

In spite of this the Dutch stockmarket, the AEX index, has risen 4.7 per cent in six months. The Eurostoxx 50 index gained 7 per cent in that period.

“It is very difficult to understand why even the head of the European Central Bank [Mario Draghi] is being so positive when there is no data to support it – there is just hope, and that is not a great investment tool,” Mr Robbins said.”

 

(emphasis added)

The 'slope of hope' indeed. The fact that the Netherlands are now finally getting some attention from the Anglo-Saxon financial press is a bad omen. It means that fund managers are going to cast a wary eye at the country and may begin to place bets on a worsening of the crisis.

 

The Country that will Blow up the Euro?

Incidentally, Marketwatch yesterday published an article by Matthew Lynn from London, that is even more apocalyptic in its tone. “Stodgy Netherlands is nation that’ll blow up euro”, Lynn asserts. We are actually sympathizing with this bold pronouncement. This is because very often the biggest troubles will emerge from a corner no-one had on their radar.  Illustrating the tremendous debt problems besetting the Dutch is the following chart:

 


 

household debt

Household debt in the euro area: The Netherlands even beat the Irish in terms of their household debt, and the real estate bubble in Ireland was certainly one for the history books. Household debt in the Netherlands is 2.5 times larger than that in Greece.

 


 

Not even the credit bubbles in the 'safe havens' Sweden and Denmark can hold a candle to the one in the Netherlands. It may well be that a year from now, it will be the Netherlands' turn to go hat in hand to the 'troika'. If the 'troika' still exists by that time, that is. The term 'troika' has by the way been borrowed from post-revolution Bolshevik Russia, where a 'troika' of leaders was put in charge after Lenin's death, consisting of Stalin, Grigory Zinoviev and Lew Kamenev. Incidentally, both Zinvoviev and Kamenev later fell victim to Stalin's 'purges' and were executed on orders of their former comrade. Of course that is just a coincidence, but it isn't lacking a certain piquancy.

Back to the Netherlands though. Lynn writes:

 

“Which euro-zone country is most deeply in debt? The profligate Greeks, with their generous state-funded pensions? The Cypriots and their banks stuffed with dodgy Russian money? The recession-hit Spaniards or the boom-and-bust Irish?

None of the above. Actually, it is the sober, responsible Dutch. Consumer debt in the Netherlands has hit 250% of available income, one of the highest levels in the world. In Spain, by comparison, it has never gone above 125%.

The Netherlands has turned into one of the most heavily indebted countries in the world. It has slumped into recession and shows very little sign of coming out of it. The euro crisis has been dragging on for three years now but so far has only infected the peripheral nations within the single currency. But the Netherlands is a core member of both the euro and the European Union. If it can’t survive in the euro zone, then the game really will be up.

[…]

With a rich, export-oriented economy, and plenty of successful multinational companies, it had much to gain, one would suppose, from the creation of the single economy that was meant to come into being once the euro was successfully launched. But instead it has started to play out a depressingly familiar script. It is blowing up in exactly the same way that Ireland, Greece and Portugal did — except on a slightly longer fuse. Low interest rates, set mainly to benefit the German economy, and lots of cheap capital led to a property boom and an explosion of debt. From the launch of the single currency to the peak of the market, Dutch house prices doubled, making it one of the most overheated markets in the world.

Now that has crashed spectacularly. House prices are falling as fast as they did in Florida when the American housing boom turned sour. Prices are now 16.6% lower than they were at the peak of the bubble in 2008. The National Association of Estate Agents predicts another 7% drop this year.

[…]

The Dutch banks have 650 billion euros outstanding on real estate that is rapidly falling in value — and if there is one thing we know for sure about the financial markets it is that when the property markets collapse, the financial system is not far behind.

The credit-rating agencies — not usually the first organizations to catch up with events — have started to take notice. In February, Fitch cut the stable rating it had on the Netherlands’ debt. The country is still triple-A rated but only by the skin of its teeth. The agency pinned the blame on falling house prices, rising government debt and doubts about the stability of the banking system — the same toxic mix familiar from other crisis-hit euro-zone nations.”

 

(emphasis added)

So much for the current situation in the Netherlands and the dangers faced by its highly leveraged and banking system due to its vast exposure to the bursting bubble.

 


 

Dutch housing data

Dutch house price data, via the Global Property Guide

 


 

Devaluation and Inflation Are Not 'Better' than the Euro

We do of course have one quibble with Lynn's assessment. Namely, what we are witnessing is by no means a currency crisis; it is a debt crisis. While it is true that the ECB's 'one size fits all' monetary policy bears a great deal of responsibility for the boom-bust cycles in the euro area, this does not mean that central planning by independent national central banks issuing their own confetti would be any better.

The underlying assumption of much of the criticism aimed at the euro is always that it would somehow be preferable if the countries in crisis were able to devalue and inflate, i.e., simply rob their domestic savers. The opposite is true: their inability to devalue and inflate is forcing them to adopt reforms they would otherwise never consider, because they are held to be 'politically impossible'. Of course we remain highly critical of the fact that these reforms are enacted at a snail's pace and are going nowhere near far enough. Moreover, 'austerity' has so far mainly meant 'higher taxes', resulting in a quite toxic policy mix overall that has ensured deep, long lasting recessions.

However, none of this means that devaluation and domestic inflation would somehow be preferable or 'better'. It is not the fact that they use a common medium of exchange that is creating problems for the members of the euro area. It is the fact that this medium of exchange is a centrally planned fiat money and that the commercial banking system is fractionally reserved, a combination that has produced unsustainable booms across the region, which have resulted in an inevitable severe bust.

In the first decade of the euro's existence, the  true money supply has risen by nearly 130% – with strong regional differences in money supply growth recorded along the way (i.e., the periphery saw the by far biggest increases in credit and money).

 


 

euro area TMSEuro area true money supply, by legal categorization (via Michael Pollaro). In the first decade of the euro's existence (beginning in 2000), the true money supply grew by nearly 130%. It should be no surprise that this has gone hand in hand with unsustainable booms and bubbles.

 


 

Conclusion:

We have long argued that the euro area's debt crisis would eventually move on to the so-called 'core'. France is in severe economic trouble and now the Netherlands are as well. In France, the housing bubble still remains intact, but it is probably on borrowed time as well. Banks are everywhere deeply involved in the financing of these bubbles, and they will be left holding the bag, along with borrowers and tax payers.

If Jeroen Dijsselbloem is to be believed regarding the EU's approach to dealing with future banking crises, then depositors at Dutch banks have absolutely no reason to feel safe either.  The euro area's debt crisis is not over by a long shot.

 

 

Charts by: Eurostat, Michael Pollaro, Global Property Guide


 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

4 Responses to “Nether-Crumble, Part 2: The Meme Spreads”

  • macr:

    Household/Housing debt in the Netherlands is high but pension reserves are 180% of GDP, in contrast Germans pensionreserves are only 70% of GDP.
    http://www.cbs.nl/nl-NL/menu/themas/macro-economie/publicaties/artikelen/archief/2012/2012-3680-wm.htm

  • mannfm11:

    There seems to be nothing ever said about poor underwriting of lending.  Has the trend of inflation gone on so long that repayment through the provision of more and more credit debt into the system is a foregone conclusion?  Not only is money mispriced, but the capacity to liquidate debt is not recognized.  There are some mathematical paradoxes involved in debt and credit that I don’t believe are understood under any formula, which is why nothing works the way it would seem it should work.  Even under the threat of inflation, low rates force people to hoard more money, the alternative being holding long term assets priced against low yields, a market risk only taken by those that don’t understand the discount.  As such, it appears the risk discount on real estate here has settled in the 6% to 7% range.  That sound fantastic to many, especially those that believe the price will go to the moon.  But, what happens when rents become less assured or fall?  Valuations go, then risk premiums rise.  Shrinking the currency, in light of capital gains penalties, depreciation allowances and invested capital, merely hides the loss.  Clearly more to come in this slow motion train wreck.  Thanks for the Post

  • Crysangle:

    “The underlying assumption of much of the criticism aimed at the euro is always that it would somehow be preferable if the countries in crisis were able to devalue and inflate, i.e., simply rob their domestic savers. The opposite is true: their inability to devalue and inflate is forcing them to adopt reforms they would otherwise never consider, because they are held to be ‘politically impossible’. ”

    Maybe the main point with the Euro is that instead of domestically tailored rates that previously matched individual political and social realities , states have gone all in, the financial world has gone all in , after the variables of independent currency values and domestic legislation appeared lifted . So , in other words , the problem is still the Euro , and the question is , maybe, whether it is worth individual states staying committed to a so far illusory central resolution and non-functioning central authority or whether it would be better to return to nationally managed fiat . The answer to that is very complex as each person has his/her own experiences past and present , as well as their own future concerns . So it is not just a debt crisis , it is a kind of identity crisis , a political crisis , which people feel they are not able or allowed to escape legitimately , or where they are not willing to be seen as either failures or insincere . I think that the notion of European solidarity on this front is being rejected for the simple reason that there is no honest reply available from the head of EU , and so people are left in a void of understanding as their national leaders make adjustments in the surroundings that seem to be designed to suit no-one. Have you heard one main acting politician admit that the Euro project is/was a mistake ? I haven’t , though from the sidelines there are an increasing number of retired politicians from varying nations and backgrounds saying exactly that.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist