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Tuesday, 29 March 2011

IMF report Article IV Consultation: Reforms by Dutch government must be executed in higher gear.

Yesterday a preliminary report was presented by the IMF concerning The Netherlands:  2011 Article IV Consultation: Preliminary Conclusions. This report that checks the financial and economic health of the country, had some interesting conclusions that I will share with you. Per paragraph I will add some commentary.

Normally I would show the most important parts of the report, but due to the length and the complexity of the report I will summarize the main conclusions, after the official introduction of the report. I will keep the paragraph structure of the official report, although I don’t mention every paragraph. Under the mentioned link you can of course find the report in full:

March 28, 2011

We expect growth to decelerate slightly in 2011-12. The outlook hinges critically on global developments and is unusually uncertain, but risks appear tilted downward. Bank capital buffers seem robust, but proactive measures to increase them further are advisable in light of Basel III standards. Efforts should also continue to further strengthen the regulatory framework, supervision of large international financial institutions and crisis resolution arrangements. The commitment to fiscal consolidation is welcome, but the sizable front-loading of the adjustment ought to be handled flexibly in light of the still frail recovery and in particular in case of a serious downturn in the economy. The momentum of structural reform should be restored and reinforced.

I don’t agree on the part that the capital buffers of the banks are robust. The quality of the bank assets, held by ING, Rabo, ABN AMRO and SNS Bank, is in my opinion sometimes questionable: I think of Greek, Irish, Portuguese and Spanish sovereigns and of the Commercial Real Estate portfolio’s of the Dutch banks. I.m.o. the write-offs on the CRE-portfolio of SNS of €790 mln (excluding goodwill) should act as a warning shot for the financial situation of the other banks.

Economic situation

1.The Netherlands suffered from a deep recession.The government had to intervene strongly in the financial sector. Export was a strong factor in the GDP growth of 1¾ % in 2010. Unemployment has risen only modestly, due to labor hoarding. Inflation is picking up now.

The labor hoarding that has taken place in The Netherlands might seem a good idea, as the export is now picking up steam. In my opinion it has hindered the attempts of companies to increase efficiency and to get rid of overcapacity in the production lines.

2. The banking system is more sound than two years ago, but is still fragile. Equity vs unweighted assets is still quite low. Mortgages are seen yet as being low risk in The Netherlands. Nonperforming loans remain manageable at about 3 percent of total loans. Bank profitability, though still weak, has recovered slightly. Coverage of pension funds is still moderate, due to low interest rates. Also the insurance industry has a difficult time.

It is true that the banking system is still fragile. This is caused by the fact that bank were never forced to exactly disclose what the quality of their assets is, valueing their assets “marked-to-marked”. Everybody knows that the banks hold CRE of questionable quality, sovereign bonds of the PIIGS and other assets that should be depreciated, but nobody knows exactly how much it is worth.

3. The housing and mortgage markets appear relatively stable, although vulnerabilities are rising.Although housing prices were stable during 2009 and 2010, they are declining slightly now. Housing prices are not too high compared to the fundamentals. The risk of a contraction of house prices is relatively low. Banks run little risk with mortgages, as mortgage default rates remain very low. Household debt, however, is very high with 270% of disposable income. The mortgages are extremely high compared to the value of the collateral. This is mainly caused by Mortage Interest Deductability.

I agree with the IMF that the MID caused the mortgages to be much too high, compared to the value of the houses. I don’t agree that the housing prices are not too high. If you look to Belgium and Germany, you see that housing prices are much, much lower there, compared to nearby cities in The Netherlands. Mortgage defaults are very low in The Netherlands:
-   People get stuck with residual debt for many years after a mortgage default and forced house sale.
-   Banks don’t want to write-off on their collateral, as this deteriorates their capital buffers.

4. The fiscal position deteriorated sharply in 2009, but is already improving. In 2009 the government had to deal with a deficit of 5½ percent of GDP, due to various stimulus programs. Much higher tax receipts reduced the deficit to 5¼ percent of GDP. Public debt has risen to almost 64 percent of GDP at end-2010, owing also to financial sector assistance not reflected in the deficit.

Luckily the Dutch people could act as a milch cow to keep tax income up-to-date: not only for national, but also for local authorities. Nobody in the government cares what this does for the household income of normal, middle class families/

5. Pressures from population aging complicate achievement of fiscal sustainability.The aging people of The Netherlands will increase healthcare, pension and old-age spending for the future. This, together with the financial aid to the financial sector makes the Dutch finance situation harder to sustain for the near and distant future (up to 2060)

The Netherlands has a big issue with the ageing of the Dutch people. Improved health might make it easier for people to work longer, but people that are currently in their forties have an outlook of working 5-10 years longer than people that retired 5-10 years ago. Many people will not consider this a fair deal.

7. The outlook is unusually uncertain and risks—primarily from external sources—appear tilted downwards.The sovereign debt market is a risk, due to jittery investors and also the cross-border financial exposure is risky currently. Fiscal tightening in many European countries could have a negative impact on the export of goods and services.

8. Against this background, the Netherlands must secure the recovery, mitigate lingering vulnerabilities, and address long-term sustainability issues. In the near to medium term, with euro-area monetary policy close to the limits of its ability to shore up demand, fiscal policy must strike a balance between support of economic activity and preventing budget deterioration. Longer-term policies should strengthen financial stability, ensure fiscal sustainability, and advance structural reforms to boost potential output.

In straight English: don’t tax the country’s economy to death. I totally agree with this statement.

Financial sector
9. The bank sector and especially bank capital and liquidity should be watched closely. Stress tests conducted at Dutch banks gave satisfactory results, regarding the Dutch banks being shockproof. However, equity-asset ratios are still quite low. The government should move towards less ownership/creditorship of the large Dutch banks

Everybody with a brain agreed that the stress tests were a laugh, as no bank – including the Irish banks – failed the test. Even the new stress test leaves sovereign bonds and other assets held to maturity out of scope. And the IMF contradicts itself with their statement: that the stress test showed that Dutch banks are shockproof, but need to improve their capital position. If the banks are shockproof, their equity capital / assets position is OK. Otherwise the banks are not shockproof: it is that simple. In my opinion the Dutch banks are not shockproof at all.

10. Action to mitigate housing market vulnerabilities and distortions is needed, including a gradual reduction in MID. The Dutch financial system has a heavy exposure to the housing market.As a first step it is OK to limit the maximum loan to value (LTV) ratio for new mortgages to 110 percent and require that 50 percent of new mortgages be paid off over their lifetime. However, the government must do more to lower the LTV and to increase principal repayments. The MID is too generous and distorts the housing market. Therefore it should be lowered in steps. The government should make a clear statement about it. The social and private rental market should be reformed. Housing taxes should be lowered.

My applause for the IMF: the spineless attitude of the Mark Rutte-cabinet towards the MID should be altered asap. The MID distorts the housing market in a terrible way

14. Stricter fiscal policies should only be carried through earlier, if they don’t destroy future economic growth .
Currently the Dutch government wants to carry through stricter fiscal policies earlier than previously scheduled. This could have negative consequences for short-term growth. Especially in a situation of inflation this could have negative effects. Extra European taxes/costs could pose an extra problem when a slowdown of the economy occurs, as this can have negative consequences for Dutch exports.

I agree with this: it is better to leave taxes at a stable level of even decrease them, than to put extra taxes on people and companies, to keep the inflow of money for the government and local authorities stable. Unfortunately this is probably not going to happen, as this country’s government and local authorities are addicted to taxes.

15. When the economic recovery stalls, there should not be ceiling levels to automatic stabilizers like Unemployment Benefit.
Extra retrenchments on f.i. Unemployment Benefit could bring the Dutch economy in a negative spiral. Also the government should consider to ease fiscal measures if the economy deteriorates. In this situation it would be better to increase the pension age to 67, as this improves fiscal sustainability.

I agree: people that don’t have any money left, don’t buy products and don’t save for a rainy day. This will further deteriorate the economy.

Structural reform
18. To maintain potential growth amid a stagnating population and aging pressures, the mission supports policies to encourage greater work effort and productivity.
Apart from increasing the retirement age, labor market reforms should overhaul tax and benefit systems to curtail disincentives to full-time female and elderly work. Unemployment benefits are fairly generous and discourage job search, worsening unemployment duration. Fostering research and development (R&D) expenditure, which is fairly modest, and combating traffic congestion would enhance productivity. Various estimates put the Netherlands among the countries with the highest congestion costs. Stepped-up investment in roads and railways, requiring some relaxation of strict zoning regulations, opening the transportation sector to more competition, and enhanced recourse to road pricing schemes could alleviate congestion and thus spur productivity.


In general my conclusion is that this IMF Report is not a bad report at all. However, looking at the current Cabinet Rutte, I don’t expect that much change will come from that.

This cabinet is busy:
-  Remaining friends with the wealthy people by sustaining the MID, although this totally distorts the housing market (viewpoint of VVD (liberal party))
-  Remaining friends with the poor white people  by leaving the retirement age at 65 and blocking all measures that make the Dutch economy more flexible and competitive, like the laws governing dismissal.(viewpoint of PVV (party of Geert Wilders))
-   Taxing the Dutch middle class to death with all kinds of government taxes and taxes by the local authority.

And that is a shame for everybody who truly loves The Netherlands.

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