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Friday, 30 December 2011

An SMS from Ernst (22): Short Messages Service

Today is a typical day for ‘An SMS from Ernst’. No real breaking news, but loads of small news messages about the Dutch and European economy. Here are the most important news items of today.

Number of bankruptcies rose slightly in The Netherlands in 2011

The Dutch website Faillissementsdossier (; i.e. ‘default dossier’) presented the final data on 2011 in a press release, of which I show the pertinent snips.

The overall number of bankruptcies rose only slightly in 2011, when compared to 2010; by 87 to 10,151 from 10,064.

Remarkable was the increase in the number of defaulted companies in the second half of 2011 by no less than 6%. By itself, an increase in the second semester is not unusual. ‘Many companies suffer from a cash flow problem after summer’, according to Marcel van den Berg of Faillissementsdossier. ‘The holiday money has been paid out  (≈ one month salary), while at the same time less invoices can be sent to customers. However, an increase by 6% is very much’.

The increase in the number of defaults is closely connected to the development of the economy. Until the second half of 2011 the economy has been growing, but a recession started in the last two quarters of 2011. Normally, a deterioration of the economy does not lead immediately to soaring defaults. ‘Companies can stay afloat by additional loans, by usage of money in reserves and by keeping creditors at a distance’, according to Van den Berg. Therefore he presumes that the number of bankruptcies will keep on rising in 2012.

The real estate industry (Commercial + Residential) took the heaviest blows in 2011. The number of defaulted real estate companies – landlords, private investment funds and realtors – soared by 31%. Main cause of this increase: vacancy in the Commercial Real Estate market (CRE). This led to substantially declining prices per square meter and dropping rental yields.

Also in the retail industry and the food and beverage industry the number of defaults soared. Declining consumer spending had a negative impact in both industries. On top of that, retail suffered strongly from the soaring popularity of e-commerce.

That in 2011 the number of defaults/bankruptcies increased in The Netherlands is not a surprise to me. And that the numbers mainly rose in the real estate industry and the food and beverage business is also not surprising for the steady readers of my blog. 

That the number of defaults rose by less than 1%, however, is a pleasant surprise. I expect this figure to be much worse in 2012, as the 6% increase in the second half of 2011 is already like a giant alarm bell.

What you can read between the lines in this article, is that companies have no reserves anymore and also don’t have access to other sources of emergency money (hence: bank credit). The contracting economy in Q3 and Q4 led immediately to a soaring number of defaults. That is a very worrisome and telling signal that companies are financially in bad shape at the moment.

Dutch mortgage market locked-up further in last months of 2011

The Dutch financial newspaper Het Financieele Dagblad ( writes about the continuing problems on the Dutch housing and mortgage market. This confirms yet another time my thesis that the housing market will remain locked until housing prices drop by at least 30%.

Please read also House prices in The Netherlands keep dropping and Hundreds of thousands of families in danger of defaulting on their mortgage for some background data. Here are the pertinent snips of the FD news story:

Dutch banks hardly issue new mortgages. The growth of their mortgage portfolio came in November to a grinding halt.

The banks saw the value of their mortgage portfolio increase by just over €523 mln (0,1%) to €532 bln. This was the lowest monthly increase in eight years. This was disclosed in statistics that were published on Thursday, December 29 by the Dutch national bank De Nederlandsche Bank (

In October, the total mortgage portfolio grew by 965 mln and in the previous months growth amounted to €1,5 bln per month. In the good years 2005 and 2006 the mortgage portfolio increased by an average €4 bln per month. In November only 2377 new mortgages were issued, when calculated based on an average mortgage amount of €220,000. In January the number of issued mortgages was still about 7000 using the same calculation.

It is not clear yet what is the cause for this alarming decline. However, there are the unfavorable developments in the Dutch housing market and the current reluctancy of banks to issue mortgages. Therefore it is safe to say that the reason behind the stalling growth of the mortgage portfolio is a decline in the number of issued mortgages and not increased redemption on existing mortgages.

For me personally, this is not an alarming, but a very healthy development. The amount of mortgage debt of Dutch households is second to none in the world (about 120% of GDP) and the total amount of privately held debt in The Netherlands is nothing less than a ticking timebomb (The Netherlands has a debt-to-income ratio of 249.5% for households) . 

Therefore it is total idiocy that people want the number of issued mortgages to rise again in the first place. One group of people that is ‘worried’ on the decreasing number of issued mortgages is the homeowners association ‘Vereniging Eigen Huis’ ( 

This association has been responsible for sheer lunacy concerning the Dutch mortgage market at many occasions. Therefore you can always wonder whose interests this association is defending currently.

30.000 workers in Small and Medium Enterprise businesses might lose their job in 2012

Today the Dutch newspaper Algemeen Dagblad ( published the results of an investigation that was executed by the research organisation EIM (, concerning Small and Medium Enterprise (SME) in The Netherlands.

EIM forecasted that 30,000 jobs would disappear in SME businesses next year, of which a substantial number due to softly-forced lay-offs.

In 2012 Small and Medium Enterprise businesses will lose a total of 30,000 jobs, based on an economic contraction of 1%. This would mean that SME is hit harder by the economic crisis than the wholesale business and the manufacturing industry. Many jobs will disappear due to natural labor turnover, the rest due to ‘soft force’. ‘These are reorganisations’, according to an EIM investigator.

This is again not surprising news and I’m even afraid that the numbers might be much bigger, when the euro crisis smoulders on next year. It makes you wonder how soft the ‘soft force’ is, however. There is nothing soft about losing your job during the biggest economic crisis of the last 80 years.

Exposure to Greece might cause larger loss for banks

Martin Visser, the savvy European correspondent of the FD, writes a story about the risk that Greek exposure causes for banks.

A haircut of 50% on Greek debt, held by banks and private owners of Greek sovereigns, might not be sufficient to make the Greek state debt sustainable.

This is stated to the Greek government by the International Monetary Fund, according to the Dow Jones press agency. There is a considerable chance that the economic forecasted must be adjusted downwards. The economic growth – contraction in the Greek case – has a big influence on the sustainability of the debt.

‘A 50% haircut is possibly insufficient to reduce the debt to a sustainable level’, according to one of the sources of Dow Jones. Another IMF-source states that the October analysis of Greek debt ‘is not longer valid’.

The Greek government is already negotiating with the banking organisation IIF (Institute of International Finance) since October. It is unclear how much progress both parties have made in the meantime. On October 26, the European government leaders agreed that banks would have to accept a 50% haircut on Greek sovereigns and that Greek state debt should be reduced to 120% of GDP by 2020.

That analysis was based on the expectation that the Greek economy would contract by 5.5% in 2011 and by 3% in 2012. When the contraction is bigger, then this has immediate, negative consequences for the possibilities for Greece to repay its debt, as tax yields reduce and social security expenses rise. Also the debt rate, compared to GDP increases.

This is exactly what I meant with the Economic Death Spiral yesterday. Greece is in this death spiral currently and it won’t get out by itself. It is really time for Marshall plan 2.0 in 2012, before the euro does indeed implode. Yesterday, Angela Merkel seemed to run the gauntlet. I hope that she is followed soon by the rest of the Euro-zone.

That’s it! 2011 is a wrap for

I wish you and your loved ones a wonderful and prosperous 2012 and remember… this too shall pass. See you back in the new year

Thursday, 29 December 2011

The 2012 Outlook for The Netherlands and Europe (part II): a decisive year

This outlook reflects my personal opinion and should not be considered as an investment advice. I don’t take any responsibility for failed investments that were based on my predictions.

This is the second part of my Outlook for the year 2012. Again it is divided in a number of topics.

The exchanges

For the European exchanges 2011 has been a lost year with substantial losses at the most important indexes of Europe. This is largely caused by the mounting uncertainty on the stability of the Euro and the European banks and by the fact that the leading European nations suffered relatively little pain since the crisis started in 2008.

Most important European indexes (all pictures courtesy of

IBEX Madrid, Spain

AEX Amsterdam, The Netherlands

CAC40, Paris, France

Dax, Frankfurt, Germany

FTSE100, London, United Kingdom

 General performance European stock exchanges:

Performance in 2011 of the European leading indexes
Click to enlarge
The US indexes performed slightly better in general. The Dow Jones Industrial index showed some growth in 2011 and the Nasdaq Composite showed a small loss. But also here the results can hardly be called comforting.

Dow Jones Index

Nasdaq Composite Index

The US economy is generally in a situation of stabilization and stagnation.While the companies in the data economy (Groupon Inc (GRPN), LinkedIn Corp (LNKD), Facebook, Netflix Inc (NFLX)) attracted very much attention from the media and the blogzone, their general performance at the stock exchanges was poor (except for Facebook, whose IPO is expected in 2012). While Groupon relatively stood its ground with ‘only’ 19% loss YtD , the performance of LinkedIn (-33% YtD) and especially Netflix (-74%YtD) was disastrous.

General performance US exchanges:

Performance in 2011 of the US leading indexes
Click to enlarge
I don’t expect the circumstances on the European and US stock exchanges to improve much in 2012. There will be green shoots again, but the general color will be red in 2012. Especially the strong Euro-countries in Europe will suffer from the pain that has been postponed in 2008/2009.

The manufacturing industry, the financial services industry and exports will be hit hard as a consequence of stalling demand at the domestic markets, in the Euro-zone and abroad (the US and the BRIC’s) and that will have its influences on the Dutch, British, French and German stock exchanges. For next year I expect again losses between 10% and 20% at the aforementioned European exchanges.

I expect somewhat better, but still mediocre performance at the American exchanges in 2012.

The economy (economic policy)

I expect the leading European economies to shrink substantially in 2012; by at least 2%, but maybe even more. And in contrary to the official planners of the Dutch Central Planning Bureau (, I don’t expect the economy to bounce back mid-2012. I think this recession might last well into 2014 and it might take at least 10 years before the economy returns to 2006 growth-figures again.

These leading economies would shrink autonomously, due to stalling demand in the importing countries (The PIIGS, the former Eastern Block and even the BRIC’s) and a lack of consumer trust at the domestic markets. This effect will be reinforced by the continuing financial problems in the Euro-zone

On top of that, the governments of the leading Euro-countries Austria, France, Germany and The Netherlands will suffer from the fact that they played hard-ball with the PIIGS countries, concerning the 2011/2012 budgets and state debt. Now these leading countries must prevent at all cost that their own government budgets and state debt get out of hand, as this would cause outrage under the leaders and the population of the PIIGS-countries.

At least the Dutch government has issued a program for €18 bln in austerity measures + €10(?) bln in additional austerity until 2015. I expect Austria, Germany and France to follow the Dutch example of additional austerity measures. The consequences of such austerity is that these economies are choked in a coma and get in a negative death spiral (see figure).

Economic Death Spiral

This figure shows the negative impact of austerity measures in a time of economic depression. But unfortunately the leading countries have passed the point of no return. They have to make cutbacks to remain credible in the Euro-zone.

I am even less optimistic about the economies in the PIIGS-countries. These will suffer enormously from the brutal austerity measures that are forced through by the IMF and the other Euro-zone countries. Expect shrinking economies of -3% to -7% in the PIIGS-countries with Greece. Portugal and Spain as negative outliers. Italy and Ireland will do slightly better,  I presume.

One exception: if the Euro-zone decides to start a Marshall-plan 2.0 for these countries, than this would be an enormous economic boost for the PIIGS. And just today  (December 29), I was very pleased to learn that Angela Merkel, chancellor of Germany, seems to move in that direction: she launched the idea that European development funds that had not been spent, could be used to rebuild the economies in the PIIGS-countries. That is an idea that is worth exploring. I give her a tip-of-the-hat for this, if this idea gets a follow-up in Europe.


I’m very clear about unemployment. In 2012, I suspect it to rise by at least 3%-4% in The Netherlands and by about 2% in Germany. Rising unemployment will probably even be higher in the other Euro-zone countries, where the PIIGS will probably be the negative outliers; not only in sheer numbers, but also in the percentage of increase.

To start with the Dutch situation that I know best. The CentralPlanning Bureau ( wrote in November 2011 that the unemployment should have gone up in 2009 by at least 4% as a consequence of the 4% decline in GDP:

After the credit-crisis broke out at the end of 2008, the Dutch GDP dropped by an unprecedented amount. According to similar situations in the past, unemployment should have increased by at least 4%, but it did rise by not more than 1,5%.

The explanation for this surprisingly little increase was lying largely in the behavior of companies. Companies kept more personnel in service than could be expected, based on development of production. They could handle this financially. The Dutch business community was relatively in good shape when the crisis started; in much better shape than in earlier crises. Profits were high, the net cash position favorable.

Well, the good shape, that the CPB speaks of in this snippet, is gone now. Many companies, like the one that I work for, wrote red figures over the last three years since 2008. And although some companies still managed to make a decent profit during this period, I don’t expect the Dutch companies to maintain their excess personnel when the current recession proves to be a nasty one. The period of mass lay-offs that I noticed during this year has only just started, is my conviction.

And while Germany is currently still the ‘golden child’ in Europe with its massive exports all over the world, I cannot imagine that it can maintain this status in 2012. Germany will have to step back slightly and this will have immediate consequences for the German employment situation.

And remember: these are about the strongest countries in Europe.

Consumer confidence

Here is the picture that says it all about consumer confidence:

Data courtesy of Eurostat (
Click to enlarge
Even in the most succesful Euro-country Germany, the consumer confidence is moving in a downward reaction beyond 0% (0% = as many positive as negative people), albeit less substantial than in other Euro-countries. 

However, it needs to be said: the consumer confidence indicator is an indicator that can go down very quickly, but it can also go up again instantly as it is measured subjectively.

Still I presume that the trend for 2012 will be pointed downward. The results of a declining economy, growing unemployment, stalling demand from the importing countries inside and outside Europe and the continuous soap opera around the Euro will have its toll on consumer confidence.

But of course less confident consumers will remain using normal daily consumption goods and food stuffs. And people won't stop shopping for clothes or presents, during holidays and end-of-season sales periods. 

What does happen, however, is that people spend less money during these typical sales periods.They will also postpone spending on expensive luxury goods and durable household appliances that don’t need to be replaced immediately. They will also spend less money in hotels, pubs and restaurants. This will have its effect on industrial production and the food-and-beverage industry.

Summarizing: 2012 will be a hard year for most European countries, but it will also be a decisive year. If the government leaders take the right steps, like Angela Merkel seems to do right now, it can be a fresh new start for Europe and the Euro-zone.

If the leaders fail, however, it would put Europe deeper in a long-lasting depression with devastating results for all European countries.

Wednesday, 28 December 2011

Chairman of the Association for SME entrepreneurs (MKB Nederland) misses the point by a light-year in FD Op-Ed of Saturday December 24.

Hans Biesheuvel, chairman of the ‘Association for Entrepreneurs in Small and Medium Enterprise’ (SME) in The Netherlands (aka MKB Nederland) wrote an Op-Ed to the Dutch financial newspaper Het Financieele Dagblad (; no link available). This Op-Ed contained his ideas for getting out of the current recession in The Netherlands.

Unfortunately, in his Op-Ed Biesheuvel misses the point (of getting out) of the current crisis, by a light-year.

Here are the pertinent snips of his article, accompanied by my comments:

The Netherlands has a strong economy, thanks to a very diverse trade and industry. […] There is a good foundation. The peak segment policy for business with a large SME involvement. Innovative companies can profit from the €0.5 bln in the national innovation fund. The new pension agreement will bring peace of mind to retired and working people.

The peak segment policy might help to focus government support to companies and reduces fragmentation of subsidies. One of the inevitable side-effects, however, is that innovative and strong companies outside these peak segments will hardly get government support and thus become less competitive. This could force other innovative companies to solely focus on the top segments, which will cause attenuation of Dutch business.

And then the subsidy amount of €500 mln: compared to the amounts that were used to save the banks, this is nothing more than petty cash, especially when you consider the cutbacks in education that have been made by this and earlier governments in The Netherlands. And a pension agreement that was able to disintegrate the biggest labor union in The Netherlands, will not bring peace of mind to retired and working people.

Together we have a lot to do to keep our prosperity and well-being. What does the agenda for 2012 look like?! One problem should be solved before others: saving the Euro and stabilizing the financial markets. The current loss of consumer and producer confidence is caused by the lack of trust in the Euro and the unstable financial markets. The Netherlands lives from its exports and we need to secure this. There are hundreds of thousands of jobs at stake when the Euro falls or the financial industry implodes.

One of the problems in Europe currently, are the current imbalances in the trade and capital accounts. The Dutch and German export surplus is the import surplus of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries. If we keep those imbalances fully intact, the credit crisis in Europe won´t be solved. This is a very simple problem, but if you do not understand or accept this, it is impossible to solve. This is where Biesheuvel misses the point.

And unfortunately, the financial industry itself put its life on the line with the explosive expansion of its balance sheets, its enormous leverage and its irresponsible lending behavior in the recent past. The Dutch financial industry is 'too big to save' for a small country as The Netherlands.

It would be unwise to let our own government finances lose track and alienate the parties that buy our government bonds. Growing interest as a consequence of a financial downgrade of our country would make our problems soar. Therefore we have to arrange extra austerity measures on top of the current measures. But we have to do that in a way that doesn´t harm our companies. Therefore it is undesirable to flee to tax increases.

I don´t agree with the first three lines. In our state budget and state debt, there is still room for some extra debt, without running the risk of a serious downgrade. With that extra debt it would be possible to spare the Dutch citizens that already suffer badly from other tax increases and austerity measures.

With the extra austerity measures, the situation for the Dutch citizen will inevitably deteriorate. And people with less money will consume less. You cannot make cutbacks without consequences. That is something that politicians and other public figures don´t want to understand or admit. I happen to agree with the last two sentences in this paragraph, but you can´t make an omelet without breaking an egg.

We will have to look to the Dutch housing market, although we should be very careful with the Mortgage Interest Deduction (MID); that MID should stay. Let us start a vast housing insulation program, now the production of new Residential Real Estate is stalling.

Biesheuvel is also one of the fools that believe in the eternal power of the MID. In reality, the MID is one of the most market-disturbing government measures that has ever been taken and it consumes €12 bln of taxpayer money per year. Biesheuvel stays firmly in the ostrich position and wants to start a program for housing insulation. As if such a bogus program could save the whole building and construction industry that is formed during a time of structural excess consumption and lending. And who is going to pay for this program? The Dutch tax-payer? Or the house owner that is already drowning in debt? Get real!

When concerning healthcare, the users (i.e. patients) should pay more by themselves. Living longer is beautiful, but if we think this is part of our prosperity, than we should have to choose and pay for this, at the expense of other expenditures.

“Sorry, Grandpa. Mr. Biesheuvel thinks that you are too old and as you can´t afford your medical costs and I don´t want to pay for those, we suggest you go to Japan and ascend Mount Fuji to die there; just like the traditional Japanese people did”.

This is flawed reasoning by Biesheuvel. Whether we pay for healthcare via income and value added taxes or via our net income, we ALWAYS pay for our health expenses. The real points are:
  • Do you skip the solidarity principle (everybody pays partially for the healthcare costs of all Dutch people via social insurance) or not?
  • Do you want to pay for all life-enhancing treatments for elderly and seriously ill people that are currently possible or not?

But Hans Biesheuvel doesn´t say that and therefore misses the point again!

The labor market should be reformed. The duration (and not the amount) of the Unemployment Benefit(UB) should be decreased. The earlier people start to look for a new job, the bigger the chance they will find it soon. And it should be made more attractive to take older employees under contract. This is now obstructed by the high costs for dismissal.

Again Biesheuvel misses the point by a light-year. Most people without a job that want to work (!), start applying for a new job almost immediately. The duration of their UB won´t have much influence on their behavior, just like a dismissal fee that they perhaps received won't. The only people that don´t want to apply for a new job immediately are people that are stuck in a legal battle with their former employer and hope for a return to their old job.

However, when the going gets very tough, a longer lasting UB might prevent unemployed people from dropping back to welfare level. This is good as companies are often very reluctant to hire someone out of welfare, as they are afraid that these people can´t/won´t work. And people that really don´t want to work are often already unemployed for a long time and already ´enjoy´ welfare.

And towards elderly people, Biesheuvel clearly has the mindset that these people mostly don´t want to work anymore or that they are often ill. Therefore it should be easy and inexpensive to ´get rid of them´. Many employers have such a distorted world view, unfortunately.

I finish with a public call for a national agreement on keeping a zero per cent wages increase, where government wages, social benefits and private sector salaries are kept at the same level as this year. This not only divides the pain, but delivers much money instantaneously. This should enable really necessary reforms.

What Biesheuvel ´conveniently´ forgets is that a 0% salary increase at 2.6% inflation in fact means a 2.6% salary decrease. I don´t want to start a discussion on the right way to measure inflation – deflation, but these are the official inflation figures. What Biesheuvel also doesn´t state is that the top level salaries in smaller and larger companies soared during the last twenty-five years, while the medium and lower salaries actually decreased in purchasing power. People are more and more reluctant to consume already and the prospect of further loan reduction will not help to trigger this consumption again. Therefore Biesheuvel misses the point hugely.

My advice to Biesheuvel is: back to the drawing board and come up with something better. Neither labor unions nor independent workers will accept these limited measures that happen to totally miss the point.

The 2012 Outlook for The Netherlands and Europe (part I): a decisive year

This outlook reflects my personal opinion and should not be considered as an investment advice. I don’t take any responsibility for failed investments that were based on my predictions.

Today it is December 28, 2011; three days before the end of the year. A year that many people hoped ‘would bring new economic growth and zest to Europe and the United States’. In reality, it brought in Europe the second leg of the credit crisis.

And in the US? A situation of stagnation at best, with stagnating unemployment rates, a stagnating consumption and a stagnating housing market. Although there have been the proverbial green shoots during the year, these looked in general like green asparagus in a big bowl of tomato soup.

And now the year 2012 will come. The year of which the Maya’s said, it will bring the end of the world as we know it. And although I neither believe the Maya’s, nor Nostradamus, the Jehova’s witnesses or the position of the vermicelli in my soup bowl after eating, 2012 will be a decisive year.

It will be the year that either decides whether we have a W-shaped recovery, or an L-shaped (L for Long) recession aka depression. And it will be a year in which we hope that the leaders will show their true leadership, strenght and wisdom, but in which we fear their selfishness, indecisiveness and stubbornness close to stupidity.

Like many other newspapers and bloggers I will make an Outlook for 2012, based on a number of topics. Although such an outlook is the (non-)scientific form of ‘reading tealeaves’, it might help you to organize your own thoughts on the economy of the coming year.

Today the first part of this outlook will be issued and tomorrow the second part. As this will be a bearish outlook in general, I hope to be wrong in most cases. But I’m afraid I will not be.


As mentioned earlier, 2011 was not the year in which our leaders surprised us with their leadership, strenght and wisdom. This was the year of: everybody for themselves and God for us all in Europe and Democrats vs. Republicans (Civil War v1.1) in the US.

To be honest: I’m not very hopeful that this behavior of EU and US politicians will change in 2012 and that the true leaders will stand-up. If the situation around the Euro and the PIIGS remains fairly stable and doesn’t become much more desperate at once, the European leaders will continue with only paying lip service to the European cause. They will go on with pleasing and serving their (more and more xenophobic and autistic) grassroots instead, while ignoring the European big picture.

In that case the financial markets will continue firing warning shots and the Euro will remain under continuous pressure, without breaking really. Europe will run a substantial risk of getting into a situation of stagnation and a long period of minimal growth that might last for ten years or even longer (the Japan scenario).

As we speak, President Barack Obama is busy with trying to lift the debt ceiling in the United States, as he did before on a number of occasions in 2011. And every time this led to a brawl between the Democrats and the Republicans, as both parties tried to get their portion of pork in the emergency laws that were necessary to fix the debt ceiling. By the way, until now the Democrats have been less succesful in saving the social security system than the Republicans have been in saving their tax cuts for the richest 1% of the American population. This is a bad omen for American leadership, I guess.

The only trigger for really new leadership might be when the economic situation in the EU and/or US deteriorates in such a tempo, that new leaders must rise to save the day and push the old leaders to the side. This might not be a pleasant process, however.

The Euro and the European Debt Crisis

In spite of all the sensational, short-winded and gloating news from ‘the Anglo-Saxon regions’, like the US, Canada and the UK that predicted ‘the fall of the Euro within ten days’, the Euro is still here and it is here to stay.

Forget Mish and all the other false prophets of Euro-doom and gloom. And forget British members of the European parliament screaming at the chairman about the subject of their wrath: the Euro.

Just look at the facts: The Euro-region as a whole is still much healthier than the United States’ and British economies. It are the exceptions, however, that cause everybody getting the willies: Greece, Portugal, Spain, Ireland and Italy (i.e. The PIIGS).

The fact that I’m not optimistic on European leadership in 2012, makes that I’m not optimistic on the Euro in 2012. But I’m not so pessimistic that I think that the Euro will be abolished in 2012; there is simply no alternative for it.

The European debt crisis, however, will not be solved in 2012, unless there is an immediate cause for it. This is clearly a leadership problem, as I wrote before in this article.

It is much easier to play the ‘blame-game’ towards the peripheral countries and to ‘save our own export’ than to push all acrimony to the side and create a giant Marshall-plan 2.0 for the PIIGS-countries, helping them to recreate their economies. But ‘easy does it’ does not work here! If the ECONOMIC problems in these countries will not be solved in 2012, than the European debt-crisis won’t be solved too. And the economic problems won’t be solved, before the structural imbalances in Europe (huge net-exporters vs huge net-importers) are taken away.

Now the only thing that happens is that the EU and the IMF are cutting down the living daylights out of the PIIGS. As a consequence of the austerity measures that were introduced in Greece, some Greek people started to live in caves again (sic), as they can’t afford their houses anymore. And one in two shops in Greece is vacant currently. Economic recovery for Greece is a mirage and the situation in Spain and Portugal isn’t much better.

As I wrote earlier in this article: my most plausible scenario for 2012 is one of stabilization and stagnation of the Euro-crisis, with ‘pivotal’ EU-meetings throughout the year, but without true solutions for the existing problems. The situation won’t become much worse, but it won’t become much better either. The relatively unhealthy Euro-countries (i.e. The PIIGS, France (!) and Belgium(!)) will stay unhealthy and the ‘healthy’ countries (the others) will become less healthy as a consequence of the continuous pounding from the financial markets. Interest rates will go up for all parties involved and the economies of all countries will deteriorate. Unless…

The banks

In my opinion, 2012 will be the year of continuous pressure on the banks, due to:
·    (inter)national legislation and supervisory rules;
·    growing capital demands (i.e. Basel III) that minimize the banks’ possibilities for profitability;
·    the wholesale markets for funding being close to a lock-down situation
·    the lack of mutual trust between banks;
·    deteriorating asset quality;
·    the soaring distrust of banks in their own customers;
·    the classic earnings model turning into a mirage.

Legislation: In 2012, the internationally operating banks will presumably be caught in a web of national, international and supranational legislation. In The Netherlands alone the credit crisis and the stalling housing market led to a boom in legislation and new supervisory rules, all meant to put the banks on a short leash.

It is an illusion to think that all international legislation and supervisory rules will be complementary to existing legislation in other countries. What is mandatory in one country might be a crime in another country. Think for an example of the Swiss banking secrecy vs. US legislation towards tax evasion. I therefore expect the number of criminal cases against banks to go up in 2012, for cases like helping with tax evasion, misfeasance, inadequate information, fraudulent or illegitimate advising and illegal offshoring of assets by using Special Purpose Vehicles.

Capital demands: Another factor are the Basel III capital demands that are getting more serious for banks currently (solvency and liquidity demands) and force banks to either increase their equity or shrink their balance sheets, while keeping large amounts of useless cash in order to meet the Basel demands. Both options are extremely unattractive at the moment and will remain unattractive in 2012. Two questions concerning this topic are:
·    Who wants to buy the assets that other banks abolish, unless for an absolute bargain price that makes the investment virtually risk-free?
·    Who wants to invest in a financial institute, when the current earnings model has become obsolete?

The answer is: nobody.

The only thing that banks therefore can do is cutting costs and hoarding profits. Banks will in return show more and more risk-averse behavior and will be less and less helpful to their customers.

Wholesale markets: at this moment we have the crazy situation that European banks have stored about €412 bln AT the ECB, while 500 other banks borrowed €459 bln FROM the ECB through a special lending facility. This means clearly that the wholesale money markets don’t work at all at the moment, making the ECB in fact the lender of last and only resort.

Mutual trust between banks: This subject has everything to do with the previous subject. Banks don’t trust eachother and especially don’t trust other bank’s assets. They are afraid to find ‘shaky’ assets, like bad sovereign bonds, bad Commercial Real Estate (CRE) loans, bad Residential Real Estate (RRE) loans, mortgages and coverless loans and worthless derivatives with excess book values.

Banks rather stash their whole excess money supply for 0.25% interest at the ECB than to lend it to another bank for 1+% interest. I expect this situation to remain unchanged for as long as banks don’t give full disclosure on their asset quality.

And I am very pessimistic whether this full disclosure will happen during 2012: only when you look under the hood, you can see that a car doesn’t have an engine. Therefore I suspect the hood to be locked tight in 2012.

Deteriorating asset quality: The amount that Dutch banks have written off on their mortgages and especially the collateral for this mortgage, is still minimal. As long as people pay their mortgage, this is not much of a problem. It becomes a problem, however, when people can’t pay their mortgage anymore and can’t sell their house at the same time.

When the collateral needs to be auctioned, the yield might be (far) below the book value that is kept by the bank. That means a substantial write-off for the bank. And now the number of auctions is still low, but I’m convinced this will change for the worse in 2012.

The same problem with excess book value occurs in my opinion within the CRE-portfolio of banks. On December 5, I wrote about the totally failed auction of CRE owned by Uni-Invest , in spite of a 40% discount from the normal sales price.

Since then I didn’t hear or read anything about huge write-offs on CRE at the large banks. My conclusion is: nothing happened. The ticking time-bomb is still there and will be there in 2012.

Soaring distrust: banks not only distrust eachother, they also distrust their customers. It is simple: Small and Medium Enterprise entrepreneurs find it very hard to get a loan at the bank. Would-be homeowners find it very hard to get a mortgage that enables them to buy a house at current prices. Current mortgage holders are urged/begged by the banks to repay their redemption-free mortgage after all. And the only thing that banks are doing currently, is increasing their capital rates. Who is making money here?

Classic earnings model: See the previous subject. The classic earnings model for banks is dead.

The current Basel III solvability and liquidity demands make it much harder for banks to make a decent Return on Investment (ROI) for the ‘little’ amount of money they have left for investments. Besides that, for smaller banks it is extremely hard to acquire cheap capital outside the ECB and therefore these banks are very reluctant to invest this capital again.

The only category of investment that yields good profits are risky investments and most (non-government owned) banks are scared sh*tless for taking risk nowadays. The consequence is that most banks are hoarding cash and don’t want to reinvest this again. Hence: banks must think of a new earnings model, as the old one doesn’t work anymore.

Tomorrow part two in this series.

Saturday, 24 December 2011

Christmas 2011: Reflections and ponderings on the year that has been and the year that will be.

Tomorrow, it is Christmas 2011; my first Christmas as a blogger and hopefully not my last. The year 2011 brought to me the beginning of a second career, next to my official one. And it made me realize that I liked blogging very much. I hope that you come back next year and that you will continue sharing your comments and additions. They helped me very much.

Thanks everybody for the mostly positive and honest comments. And thank you for clicking on my page; maybe once or maybe every day.

And what a year 2011 has been. We had:
  • The Arabian spring that started very promising, but turned sour in the end.
  • The devastating earthquake and tsunami that hit the shores of Tohoku in North-East Japan AND the nuclear disaster in Fukushima 1 that had been triggered by the same tsunami.
  • The well-deserved and inglorious death of the greatest terrorist of all times AND the premature and honorable death of one of the greatest entrepreneurs of all times.
  • The worldwide Occupy movement
  • The second leg of the greatest crisis since 1929
  • A continuous soap of endless summits in Europe in order to save the Euro AND a continuous soap in the United States with as working title: ‘Dancing on the Debt Ceiling’.

In the following pages I will go through these topics, knowing that I’m forgetting some important other topics, but I hope that you don’t mind that I’m not a normal newspaper.

Arab Spring

The start of the Arab spring send a shockwave of optimism and expectancy through the whole Arabian world. Some of the most ruthless dictators in the world were suddenly forced to run for their life by a group of people that decided: ‘No more’. One ruthless dictator even didn’t survive it, when he was captured and subsequently lynched by an outrageous lynch mob. Although I despise all kinds of violence, it is certain that no innocent blood was spilt in that lynching that day.

Alas, the Arabian spring turned sour: the rulers of Bahrain, Saudi-Arabia and Syria and the real rulers of Egypt were clinging to power with both hands and were ready to brutally use extreme violence against the people in their country. Until the end of this year these rulers could stay in power, unfortunately.

But in Moscow, Beijing and perhaps even Washington, there has probably been a sigh of relief after they discovered that the old dictators in Bahrain, Saudi-Arabia and Syria were much stronger than the protestors. Because it is easier to deal with the devil that you know than the devil that you don’t know. And Moscow and Beijing have their own worries, as China and Russia fear a Tiananmen Square and a Red Square full of protestors, demanding the current leaders to resign. But I don’t think that the leaders of both countries can relax yet. As a matter of fact, the streets in Moscow and St-Petersburg have been filled with protestors today. And many more will come probably.

And the Arabs? I hope that they can remove the old, blood-thirsty dictators. And on the other hand that they can prevent their countries from turning into Islamic theocracies, like Iran or Saudi-Arabia. But whatever happens: it should be their own decision, as it is their own country.

The Japanese earthquake

Just 16 years after the devastating earthquake in Kobe (January 17, 1995), Japan was hit by another earthquake that was even more devastating, on March 11, 2011. The enormous damage and massive loss of life were caused by the gigantic tsunami, following on the earthquake, that crushed the Japanese shores and everything that lay in its path. The whole world sympathized with the Japanese people in those days and a lot of countries sent help. And the brave Japanese, used as they are to dealing with the consequences of earthquakes and tsunamis, quickly started to rebuild their country, their houses and their factories. And the rest of the world can only look in admiration.

In the aftermath of the tsunami, the whole world was confronted with the dark side of nuclear energy, due to the nuclear disaster in the Fukushima 1 reactor complex. A disaster of which the true impact is still unknown and will probably be unknown for years to come. In Germany, this event led to abolishing nuclear energy.

However, in other countries the nuclear lobby will maintain a low profile for the time being, until this nuclear thunderstorm is over again and the world is again longing for cheap and non-polluting (i.e. no greenhouse gasses) energy.

Famous deaths

The two most famous persons to pass away in 2012 were without a doubt: Osama bin Laden and Steve Jobs. Although both came (partially) from an Arab family (Steve Jobs had a Syrian father), the difference between both men could not be bigger. Steve Jobs dedicated his life to designing beautiful, ergonomic and innovative products that were different from all predeceasing products in the world; astonishing products that made people proud and happy.

Osama bin Laden dedicated his life to unscrupulously fighting a fundamentalist, religiously inspired and hateful ´holy´ war against ´the crusaders in the West´. Nobody understood what he really wanted and why he sacrificed so many people in his personal vendetta against the West, also Muslim people. But the fact is that he is dead and that the world is probably a better place for it. Because there has been too much hatred and useless bloodshed in the world over the last ten years. I truly hope that his death brings the end of terrorism closer.

Summarizing, both were men that changed the world a lot: one for the better and the other for the worse.

The Occupy Movement

Next to the protests in the Arab world and the protests in Russia, there have been the Occupy movements all over the Western world. And while some people laugh at their actions or simply don´t understand what the heck these guys are doing, you must respect the fact that they are there. The Occupy movements point their fingers at conspicuous consumption, the unscrupulousness of the financial markets and at the huge differences between the lowest and highest incomes (the 99% vs. the 1%).

Even if you don’t agree with them, it is good to not ignore them. When the elites in France and in Russia ignored the protesters in the late 18th and early 20th century, it led to the French and Russian revolutions; events that have had consequences until today. Let that be a warning.

The second leg of the crisis

Today, I read an Op-Ed of Pieter Couwenbergh in the Dutch financial news paper ‘Het Financieele Dagblad’ ( on the purifying blessings of the credit crisis. (link in Dutch

I would consider this article a must-read  for everybody that masters Dutch, although I don’t agree with everything mentioned in it. In one statement the author totally misses the point.

This is the paragraph in which he stated: ’The belief in economic models and free-market ideologies got serious dents, now the ‘laissez-faire’ (i.e. let it go) led to an previously unknown bubble of credit’.

I agree with this sentence where Pieter Couwenbergh points at the total lack of serious supervision on all kinds of (financial) and economic markets (like the derivative and housing market), with devastating consequences where it concerns the various (imploding) bubbles.

Where the author is dead-wrong, however, is that the authorities let the financial markets go to begin with. They didn’t do so, namely!

In 2001-2002, after the attacks on New York and at the end of the dot-com bubble, there should have been a mild recession. The dot-com bubble had imploded after a time of excess and sometimes brainless investments in internet and telecom companies. These investments were made by people that often shouldn’t have invested in the first place: the ‘pink glasses-people’ that believed in eternally growing exchange rates. When the recession would have come in 2002, the world could have returned to growth in 2004-2005.

But people like FED-chairman Allan Greenspan and his European counterparts didn’t want ‘to let it go’ and didn’t want to wait until the recession would have ended. These people started to manipulate the interest rates in order to ‘kickstart the economy’. Well, did they kickstart it!

The interest rates became so low that money became an almost free commodity in the US and Europe, that was used for buying bigger houses, bigger cars and bigger anything. Even poor, homeless people in the US got owner of a house with a jumbo mortgage on it. And also in Europe (a.o. the UK, Spain, The Netherland and Belgium) housing prices went through the roof. Until the credit crisis came…

And just at the time when most people thought that the credit crisis was over in 2011, the second leg of it came. And when my instincts don’t deceive me, it will be much uglier than the first leg, at least in Europe.

Expect: shrinking economies in the whole Euro-zone and abroad, more unemployment, more debt destruction, more poverty, more societal acrimony and unfortunately more hostility against foreign people; especially from jobless people in low-wage industries against foreigners that do have a job in these industries.

So fasten your seatbelts and grab your steering wheel, as the ‘times they are achanging’.

But to finish with a message of hope: I strongly believe that when this crisis is over, another long period of prosperity will come to us.

Europe vs. Europe and Democrats vs Republicans

I wrote a lot on the first subject and a line or two on the second. Mostly, I don´t want to write on American politics as I know too little from it.

But I have been very disappointed in both European and US politics, as they did nothing decisively to solve the current credit and credibility crisis that is growing tougher and tougher on people.All they did is spending billions of money in order to maintain the current status quo.

One thing is certain: whatever will be the outcome of the credit crisis, we can easily conclude that our current leaders are probably not the leaders that will solve it.

The current ‘leaders’ all had the chance to do so and to do it quickly, but decided that the harsh and uneasy decisions that had to be taken were too tough on themselves or on their voters. They decided that the interests of their grass roots where more important than the interests of the many European and US citizens that needed thoroughness and braveness.

Instead of people having constructive talks and doing sacrifices in order to solve the crisis, the European and US politics turned into a cacophony of useless opinions, expediency and sheer stupidity.

We had summit after summit in Europe that promised a big solution and yielded a big disappointment. And we had Republicans and Democrats fighting like cats and dogs while ´dancing on the debt ceiling´. And at the end of this year the situation is much worse than in the beginning.

But for me there is still hope. I hope that the future leaders do stand up in 2012. And I hope that they will make the tough, but fair decisions that will end this crisis in 2013 or 2014. And I hope for some personal braveness and leadership; as we saw so much of it in the past and so little in the present.

And finally I hope that you, my dear readers, will all have a very merry Christmas and that you are blessed with the good and truly important things in life. As it is life itself that is very dear to me, in spite of the harder times that we are going through at the moment.