It is again time for my ‘SMS from Ernst’. There were many interesting news items, concerning the topics that you are acquainted with at this blog: the Dutch housing market, Greece and the banking business.
Dexia considers a split-up (Link in Dutch)
The Dutch financial newspaper Het Financieele Dagblad (FD;http://www.fd.nl/) writes on the intended split-up of French-Belgian Bank Dexia. Here are the pertinent snips:
The French-Belgian bank Dexia considers a split-up, where high-risk parts of the company will be stored in a so-called ‘bad bank’, according to several media. Dexia held an emergency meeting this Monday-night, October 3, after an announcement of rating agency Moody’s earlier that day that ‘it will reconsider the creditworthiness of the bank’.
In a reaction to this news, Dexia’s stock rate took a nosedive, to close 10.16% lower.
After the meeting, Dexia came with a press statement in which it didn’t announce any concrete measures. The bank states that ‘in the current climate, the size of the portfolio of non-strategic assets weighs heavily on the group, in spite of the good credit quality of these assets’.
Dexia states, it ‘prepares the necessary measures to solve the structural problems that weigh on the operational activities of the group and to offer new growth perspectives’.
According to the business newspapers De Tijd and The Financial Times, the scenario for splitting up the bank is at the table and is Dexia evaluating the set up of a ‘bad bank’, where the subprime / Alt-A mortgages and bond portfolio could be stored.
The operation should secure ‘the good assets’, according to a source, talking to De Tijd. According to FT, Dexia’s top management discussed the possibility of letting the Belgian and French activities cooperate with other banks.
Moody’s said on Monday that it expects that Dexia’s access to the credit markets deteriorated, since the last evaluation of the creditworthiness in July. It also thinks that the liquidity position of the bank diminished. Dexia has exposure of €20.9bln to sovereigns of Greece, Italy and other countries with budgetary problems in the Euro-zone.
Dexia is a show-case model of the problems that you get when banks don’t give full disclosure on the quality of their assets voluntarily or under government pressure. Dexia can state that the quality of its assets is great until it drops, but nobody believes the company.
This is not a new credit crisis; it’s just leg two of the same 2008 credit (as in credibility) crisis. I doubt if the good bank / bad bank operation of Dexia will help to stem this distrust. If this plan won’t help, the bank might be in really big trouble.
Greeks money supply lasts until mid-November
The soap around Greece starts to be the laughing stock of Europe, the US and China. The continuing saga of Greek deficits, empty Greek promises on recuperation of the financial problems, weekly changing information on the Greek cash position, riots and strikes in Athens and indecisive and incompetent European finance ministers starts to be utterly ridiculous.
In yet another episode, Luxembourg’s Finance Minister Jean-Claude Juncker stated in Monday-night’s press conference, after the emergency meeting of the European finance ministers on Greece: ‘that no official has been discussing a scenario of Greece leaving the Euro-zone and no official has been discussing a possible default of Greece’.
The difference between Pinocchio and Jean-Claude Juncker is: both have been involved in blatant lying, but only Pinocchio’s nose grew after telling lies.
Pinocchio after telling a lie.
Picture courtesy of Disney
In the meantime, the Greek government states that their current money supply is sufficient until Mid-November. This can be read in an article in the FD (link in Dutch).
The current money supply of Greece will last into the second week of November before a default is due, if the next €8 bln tranche of the EFSF (European Financial Stability Facility) will not be paid out.
This was stated on Monday-night by Greek finance minister Evangelos Venizelos during the emergency meeting of the EU Finance ministers on Greece, according to Jean-Claude Juncker, finance minister of Luxembourg and chairman of the Euro group.
This supplies once again extra time to the European ministers and the international troika to decide on the next tranche of €8 bln of the €110 bln emergency loan. In September, there was extra time until Mid-October and now there is yet again extra time.
The Greek government announced on Monday that the estimated budget deficit for 2011 will be 8.5% of GDP. With this deficit, Athens doesn’t meet the EU/IMF requirement of 7.6%.
According to Euro-commissioner Olli Rehn of Economic Affairs, this prognosis is ‘within the plausible range of the projections’. He didn’t state what the consequences would be of the fact that the Greeks miss their targets.
Rehn stated that the Greek government should meet next year’s targets or even surpass those. Currently, the Greeks estimate a 6.8% deficit in 2012, while international agreements demanded 6.5%
Juncker announced that there will be no decision on the next tranche of the emergency loan, before mid-October.
This is not kicking the can down the road; this is smashing the can 300 meters away with a golf club. It isn’t any wonder that the financial markets are scared to death, due to this indecisiveness and utterly irresponsible behavior of the European finance ministers.
And it became clear very quickly that this could not be without dire consequences for the European stockmarkets. Again the FD:
Yet again, investors have been led by fears for a Greek default, this morning. The Amsterdam, The Netherlands-based AEX index is increasing its loss.
All AEX funds show red marks. The biggest drop among the main funds is made by Air France-KLM with a loss of 3.7%.
Exchanges in Asia were again marked by the European debt crisis, the indexes are at a loss, after Wall Street and the European exchanges on Monday.
Investors are increasingly looking at safe havens, like gold and the dollar. Gold rose 1% in value at Singapore and the dollar rose to the highest level in 9 months, compared to the Euro. Diminishing trust in the economy made the oil price fall.
Greece is a soap. And soaps unfortunately don’t end very quickly. But everybody in their right minds will know how it will end: with a Greek default. The exact details might differ, namely whether it will be a controlled or an uncontrolled default and whether it will let the Euro-zone and the European Union implode.
But at least, it makes clear that the EU without a political and economical union and centralized leadership is a ‘Dead Union walking’.
That is a message that Angela Merkel will hate to tell to the German voters, but it is the best thing she can do, just like the other Finance ministers and government leaders of the Euro-zone. But bravery is unfortunately a habit seldom found among politicians.
House Sales drop; even with a National Mortgage Guarantee (NHG)
After the international financial markets, it is now time to look closer at home: at the Dutch housing and mortgage market. The National Mortgage Guarantee (NHG), a semi-government institute that supplies ‘residual debt-guarantees’ (a guarantee that a defaulted house-owner won’t get stuck with a large residual debt) to potential home-owners, presented its quarterly report for Q3. And as could be expected, it was mostly bad news, sometimes disguised as good news.
Here are the pertinent snips of this report:
House-buyers want National Mortgage Guarantee (link in Dutch)
The number of mortgages with a National Mortgage Guarantee (NHG) has further increased. More than 100,000 consumers bought or refurbished a house with NHG. Especially the number of house refurbishments soared to 26.200; an increase of 44% YoY. More households seem to choose for refurbishments , instead of moving to another house. The number of guarantees concerning the acquisition of a house remained fairly stable with 73,000.
Housing sales is already under pressure for a longer time. At the same time more house-buyers want to make use of the NHG. The growth of the number of guarantees is not only caused by the increase of the threshold limit to €350,000. Also in the housing segment below the old threshold limit of €265,000, the popularity of the NHG increased. About 90% of the houses sold in this segment in 2011 are financed, using the NHG.
For Q4, 2011, the Guarantee Fund Owned Houses (WEW), that supplies the NHG, expects that the number of mortgage guarantees will diminish, due to a lower demand for private-owned houses.
One of the advantages of the NHG is that, after a forced sale of a house, the residual debt is taken over by the WEW. In the first three quarters of 2011, more than 1400 households claimed from the NHG after a forced sale with a loss. In 47% of the cases, a divorce was the cause for the forced sale and in 22% unemployment. In whole 2011, an estimated 2000 households will claim from the NHG.
The resistance capital of the WEW increased to €707 mln from €623 mln in the first nine months of 2011. This is the result of an increase in the number of new guarantees. The attached higher income sufficiently compensates the increased losses.
This is a deflationary report, although it doesn’t seem so at first glance:
· The number of house refurbishments soared, which shows that people rather not move to a new house currently.
· The number of guarantees remained stable, due to increased usage of the NHG in combination with decreased sales.
· In Q4, 2011, even the number of deployed NHG’s will drop.
· People choose for much more security when purchasing a house, than they would 5 years ago
· The number of declarations at the NHG soared with 1.416 (2011) compared to 981 (2010)
· The amount of the average declaration increased by 10% to €35.500
The report proves three things:
· People increasingly think that the Dutch housing market is still too expensive and therefore rather refurbish their current house. This is in spite of the 10% drop in housing prices, since 2008.
· Forced sales of houses yield in average €35,500 less than the banks have lended with the mortgage.
o What does this say about the book value of Dutch houses at the large banks.
· People in The Netherlands are clinging by the skin of their teeth to pay their excess mortgage
o 1481 is still an extremely low number of forced sales on a total population of 947,000 active guarantees: about 0.15%;
o However, the number of defaulters soared by 44% and my expectance is that this number will further increase.
I’m afraid that, although the WEW states to be well-capitalized, that this might soon change.
When the depression really sets in in The Netherlands, the number of people that divorces or gets unemployed will soar. So will the number of forced house sales and so will the residual amount that remains after the average forced house sale.
And all of this happens, just because the government won’t take measures to make the Dutch housing market more healthy.