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Monday, 2 December 2013

“Help, we lost our AAA credit rating!” What the Dutch government should do about losing its AAA credit rating from Standard and Poors, but blatantly fails to do.

Now don't be sad (Don't be sad)
'Cause two out of three ain’t bad

Last Friday, Standard & Poors had bad news for the Dutch government: a downgrade to AA+ from the cherished AAA credit rating for The Netherlands.
The explanation of this downgrade by Standard & Poors was crystal clear and left little room for denial or for blaming the messenger:

In our view, The Netherlands' growth prospects are now weaker than we had previously anticipated, and the real GDP per capita trend growth rate is lower than that of peers at similarly high levels of economic development.

After contracting by a projected 1.2% in 2013, we expect The Netherlands' real GDP to grow by 0.5% in 2014 and to slowly accelerate to 1.5% by 2016, about half the average annual rate of 2004-2007 and well below the long-term trend (1994-2009: 2.4%). We calculate The Netherlands' real GDP per capita trend growth in 2006-2016 at -0.1%, significantly below our long-term per capita growth expectations of between 0.3% and 1.5% for The Netherlands' peer group, which our ratings methodology defines as sovereigns whose economies produce a per capita GDP in excess of $27,000.

We do not anticipate that real economic output will surpass 2008 levels before 2017, and believe that the strong contribution of net exports to growth has not been enough to offset a weak domestic economy. Average real consumption and investment growth have contracted in 2009-2013 (and we expect private consumption to stagnate further in 2014 and 2015), despite the European Central Bank's accommodative monetary policy.

Consumer spending has been dampened by high household debt levels and falling house prices. Household indebtedness was 110% of GDP at June 30, 2013 and house prices have fallen by 20% from their peak, and we expect a further small decline in 2014. According to the Dutch National Bank (DNB), 16% of all Dutch households have mortgage debt higher than the value of their property. According to data compiled by the DNB, households held 280% of GDP financial assets at June 30, 2013. However, nearly two-thirds of this is invested in at least partly restricted pension plans.

Consumer confidence may also be affected by rising unemployment. The European Commission estimates this will reach 8% in The Netherlands in 2014 (compared to less than 4% in 2009). Generally, reduced government spending has weighed on growth. Although improving, capacity utilization in the manufacturing sector remains under 80% (compared to a long-term average of close to 85%), reducing the likelihood of a meaningful and sustained turnaround in investment until confidence and demand fully return.

The Netherlands' external accounts continue to support the ratings. We expect
current account surpluses to increase to an average of 10% of GDP in 2013-2016, from 8% in 2009-2012. Constant external surpluses have resulted in a net external asset position of 50% of GDP in 2013, which we expect to increase to 70% by 2016. Although The Netherlands' overall international investment position is very strong, portfolio and foreign direct investment are prominent in its external assets while many of its external liabilities are in the form of debt. We expect short-term external debt by residual maturity (much of which pertains to the financial sector) to remain above 170% of current account receipts through 2017.

We are therefore lowering our long-term sovereign credit ratings on The Netherlands to 'AA+' from 'AAA'. Although The Netherlands' less-promising economic prospects will make it more challenging for the government to achieve its fiscal targets, we believe that the policy consensus in favor of containing public debt and deficits will be maintained.

We have therefore assigned a stable outlook to the long-term ratings. This reflects our view of limited additional downside risk to The Netherlands' creditworthiness.

The Dutch government, represented by PM Mark Rutte and the ministers Henk Kamp (Economic affairs) and Jeroen Dijsselbloem, reacted as could be expected from them: with a mixture of disbelief, disappointment, fatalism and blatant denial of what happened.

Summarizing, they said: “This will not have much effect on the interest rates of our treasuries and sovereign bonds. Further, we know that we are on the right track with our measures for the Dutch economy and we remain doing the same with even more energy”. Or something like that…:

Finance Minister Jeroen Dijsselbloem states in a reaction ‘to not treat the downgrade as a warning, but rather as an encouragement’.

“The cabinet is busy with putting the state budget in order and carrying through the structural reforms, which are needed in order to enable just that we will have more economic growth in the future”, according to Dijsselbloem.

According to him, the relatively weak growth is first and foremost the result of structural problems in the economy: the labour market, the housing market and the pensions. Dijsselbloem does not expect that the credit rate reduction will have dramatic results for the national treasury: “There are still few countries that have a higher rating than we do. Two rating agencies still maintain a triple-A rating and now one gives us a AA+. We are still among the top of the world with such ratings. I don’t expect large interest effects from this rate change”.

PM Mark Rutte calls the loss of the Dutch triple A credit rating at rating agency Standard & Poor's ‘disappointing’. He does not expect any major changes to the current interest rates, for which the Dutch state borrows money. According to the Prime Minister, it is important that the interest rates remain containable. Rutte thinks that the rate reduction has already been priced in in the Dutch interest rates.

The cabinet is convinced that it is ‘at the right track’, in spite of the loss of the AAA-rate, according to minister Henk Kamp. Rutte emphasizes that, with a percentage of 2% on 10y state loans, the interest is extremely low, from a historical point of view. 

The PM thinks that The Netherlands still enjoys the confidence of the financial markets. “There are only few countries with a triple A rating and The Netherlands has one with two rating agencies. We need to continue bringing the government budget in order and reinforcing the Dutch economie through reforms. This rate change is a confirmation that we should continue the economic path that we chose”.

Jeroen Dijsselbloem and Mark Rutte, during their driver’s exam some 20-odd years ago: “Yes, mister examiner. I consider the fact that I failed my exam with you not as a warning, but as an encouragement to follow the same road more intensively”.

I am aware that politicians are truly masters in spinning a defeat, until it becomes a victory. Nevertheless, I consider this ‘encouragement’ reaction by Rutte and Dijsselbloem as a new low in the credibility of politics in The Netherlands. 

The Netherlands got its b*tt kicked by Standard and Poor’s, and they see it as an encouragement. Further, the additional reactions from both Dijsselbloem and Rutte (which seem quite orchestrated, by the way) remind me of a very good Meatloaf song: “Don’t be sad. Two out of three (rating agencies) ain’t bad”.

Both Rutte and Dijsselbloem have only scored few points, concerning the problem zones in the Dutch economy, which were mentioned by Dijsselbloem himself. The pension plans of this cabinet have been received with scornful laughter in the First Chamber of Parliament (i.e. the senate) and the cabinet's plans for both the labour market and the housing market (“all five versions of those in the past 13 months) seem to be ‘dead on arrival’.

What makes their reaction even worse; it is a total denial of what is going on in The Netherlands, Europe and the world: the economic AND psychological changes in the global societies, after an impressive series of debt and credit bubbles and cumulative imbalances exploded with a gargantuous bang.

Everybody with half a brain can see that the world has changed dramatically sincesay – 2006:
  • Risk awareness is up everywhere in the world, except for some diehard London and Wall Street bankers;
  • The attitude of the average citizen in the western world towards debt has changed from positive to very negative;
  • People have become very cautious with spending money: boundless, hedonistic consumption among every level in the population has been replaced with ‘people counting every penny before they spend it’;
  • People don’t do more with less money; they do just less with much less money. Not only because they should do so, but also because that is what they desire to do;
  • Extravagance is not a virtue anymore, but merely a sign of bad taste;
  • Compassion and empathy for and understanding of other people made way for feelings of disdain, public outrage and revenge towards other people;
  • Workers and employees often lost their status as ‘capital of the organization’ in exchange for being ‘durable means of production’ and being treated likewise;
    • Workers and employees (especially at the bottom of the labour market) know that there is always someone, who asks less money for the same job. This started a race to the bottom in some industries and fields of work;
  • A culture of settling the score with perpetrators of any kind of crime or misdemeanor has come over the world: the online lynch mob emerged, which sometimes even changed into a real one;
  • Europe has changed from 'an institute that brought international cooperation, friendship, peace and understanding all over Europe', into ‘a bureaucratic, undemocratic and  scary monster that takes away everything that we care for and brings endless flows of immigrants, who steal our money and take our jobs’;
    • Even liberal-conservatives, close to the centre of the political spectrum, speak of the EU, as a ‘trade zone’ that enables free trade in Europe: it has been and should be nothing more than just that!
  • Hardly concealed nationalism, xenophobia and religious extremism loom everywhere around the globe;
  • And there are dozens and dozens of other signals, that the world is not what it used to be in 2006. 

And the cabinet Mark Rutte thinks that you can change all these circumstances and attitude changes with 'just a few pushes of a button' in the Dutch labour market, housing market and pension industry?! 

Really?! This is so naive!

People just don’t start consuming again, after Rutte gets his state budget in order and after just a few changes in the Dutch housing and labour market. 
And there is no way that the Dutch economy will recover when only export is up, but consumption remains at the same, historically low level.

Nevertheless, I consider the comments of Standard and Poor’s to be very sensible and useful:

  • Also S&P emphasizes that growing Dutch exports are not enough to lift up the whole Dutch economy, when domestic consumption lags behind so much. Especially as exports is not such a success as some pundits make you believe;
  • Although the Dutch housing market is not the only reason for lagging consumption, I agree with S&P’s that it is an import one. The Dutch housing market needs more and better attention than it gets from ‘Housing Minister’ Stef Blok, with his five, separately ‘crashed-and-burned’ propositions for  the housing market in 2013;
  • Dutch unemployment is both a cause and a catalyst for more economic hardship and diminishing consumption. (Again), it is impossible that the Dutch economy will really show any significant growth when unemployment is still going up. It just won’t happen. 

What the Dutch government should have done, but at which it failed blatantly, is:
  • Taking the hard measure to abolish the Mortgage Interest Deductability through a 5-10 year schedule, in which the current tax breaks are used as a stimulus for (especially) middle and lower class people to reduce their mortgage debt. 
  • Taking measures in the labour market that give younger people more and older people a little less job security;
    • The cabinet should do so by altering the flex and zero hour contracts, which are currently much too flexible for employees to feel safe and appreciated in their lives;
    • at the same time, the cabinet should make the fixed contracts for older workers less rigid and unfavourable for employers. Once an elderly worker is fired nowadays, he is virtually without a chance of getting a new job;
  • Taking measures in the labour market that reduce the devastating effects of too many years of wage restraint (and reduction), by making it fiscally more attractive for companies to pay their personnel higher wages and hourly fees;
  • Spurring a restructuring operation within the building and construction industry, in which:
    • unhealthy and unviable companies are liquidated in order to diminish the excess capacity in the CRE and RRE market;
    • the structurally superfluous workers are trained and educated for a different job in the future;
  • Taking measures to restructure the structural overcapacity and vacancy in the Commercial Real Estate market and preventing local government from adding yet new CRE to this overcapacity;
  • Investing in education and innovation again;
    • not
      • by introducing new mega schools and mega universities with dozens of overpaid managers;
      • by introducing yet other educational methods that replace already effective working methods on a two-yearly basis;
    • but
      • by investing in teachers, children & students and supportive personnel;
      • by investing in research centers for both fundamental and applied/practical science;
  • Looking for projects that really help the Dutch society and economy to improve:
    • No Keynesian bridges to nowhere and roads with a capacity that never will be used fully in full, but
    • Projects that spur innovation, trade and manufacturing industry.

Still, this crisis took a lot of time to build up, before it came to surface and it will take a lot of time to break down. 

We must be patient and can’t expect miracles to happen overnight.

Nevertheless, the statement by S&P wasn’t an encouragement; it was a warning!

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