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 (www.faillissementsdossier.nl; i.e. ‘default dossier’) presented the final data on 2011 in a press release, of which I show the pertinent snips.

Number of bankrupcties rose slightly (link in Dutch)

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 (www.fd.nl) 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:

Mortgage supply in The Netherlands comes to a stand-still (link in Dutch).

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 (www.dnb.nl).

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’ (www.eigenhuis.nl). 

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 (www.ad.nl) published the results of an investigation that was executed by the research organisation EIM (www.eim.nl), 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.

SME loses 30,000 jobs next year (link in Dutch)

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.

Greek exposure might cause larger loss 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 ernstseconomyforyou.blogspot.com.

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