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


 

 

 

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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.

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