Last Monday, 29 September 2013, the Dutch Algemene
Rekenkamer (i.e. Dutch Court of Audit) presented a report concerning the exposure
of The Netherlands through state guarantees.
The Dutch state has a large
exposure towards international financial institutions, as the ESM [see the explanation in the footer of this article - EL], the EFSF and 6 others. Since the
start of the crisis, this exposure has multiplied more than tenfold. The following snips come from the English press release of
the Court of Audit.
Since the start of the
credit crisis in 2008, the Netherlands' financial ties with the international
institutions that are assisting European countries and banks in financial
difficulties have grown considerably closer. The Court of Audit has studied the
financial ties between the Netherlands and eight of these institutions, their
financial profiles and the measures they have taken to mitigate the risks.
Conclusions
The financial volume
of the guarantees and interests that the Netherlands has given to the eight
institutions audited has increased more than tenfold from €18.5 billion in 2008
to approximately €201 billion in 2012.
This substantial rise
has been accompanied by an increase in the lending capacity – and thus
risk-taking – of the international institutions. The risks may ultimately be
passed on to the countries that have given guarantees, such as the Netherlands.
We therefore think it is important that parliament has a realistic insight into
the risks that are being run, the measures taken by the institutions to
mitigate them, the institutions' capital buffers to cushion losses and the size
of the risks to the Netherlands.
Since this information
is not yet available in an orderly and comparable fashion, the report provides
the following information on eight
international institutions [a.o. ECB, EFSF, EFSM, ESM, EIB, IMF and EBRD - EL]:
- the institutions' financial ties with the Netherlands;
- the institutions' financial profiles;
- the institutions' risk mitigation measures.
Information on an
institution's risk profile is necessary when a guarantee is given or amended
because a guarantee may have to be honoured.
The Minister of
Finance could have informed the House of Representatives more specifically and
concretely about the purpose, term and risks of the new or amended guarantees.
Recommendations
Since Prinsjesdag 2012
(i.e the annual day of the King’s speech and the state budget presentation) the
Minister of Finance has included a comprehensive risk analysis in the national
budget and the central government accounts to explain the risks to public
finances.
We recommend that the minister enriches the
information provided in the risk analysis with an opinion on the financial
health of the institutions and the financial risks to the Dutch budget.
This would be in
keeping with the recommendation made by the Risk Arrangements Committee that a
separate section be included in the ministerial budgets to explain risks,
whether the ministry has formed a reserve in its budget and, if not, how it
will deal with any losses and how risks are mitigated.
We recommend that when
new financial arrangements are proposed, the Minister of Finance informs parliament promptly and explicitly of:
- the considerations
underlying the proposal (why this particular arrangement?);
- the specific
relationship between the Netherlands and the institution concerned (what
precisely is the term and what assets and events are being guaranteed?);
- how the guarantee would change the institution's financial profile (how does the new guarantee affect the institution's lending capacity and the risks to the Netherlands as a 'participant'?).
In spite of the stately language by the Dutch Court of Audit,
there is not a single word in this advice that could be misinterpreted. The
message is crystal-clear: in name of the Dutch state, Finance Minister Jeroen
Dijsselbloem and his predecessors have handed out huge financial commitments
towards a number of European financial institutions. Commitments that
multiplied more than tenfold in value in just over five years
Therefore the Dutch parliament – and thus the Dutch
tax-payers – have the right to know how rock-solid these financial institutions
and their underlying collateral are (see red and bold text). Regarding this
desire, I totally agree with the Dutch Court of Audit.
I read the official reply from the Finance Minister towards
the conclusions and recommendations of the Court of Audit. Dijsselbloem seemed not
very pleased with these conclusions and recommendations.
His reply contained a lot of mumbo-jumbo about the
correctness of the financial/economic data and technical discussions about the
heritage and goals of the mentioned financial/economic instititutions,
seemingly to put the independent reader to sleep.
Nevertheless, I was able to filter some information out of
Dijsselbloem’s reply that was akin to an answer. I will print these lines (translated
from Dutch by me) and will add my comments to it.
Dijsselbloem c.s.: The Dutch financial interest
in the eight institutions was exceptionally high in 2012, due to the joint Dutch
guarantees for the temporary emergency fund EFSF and the permanent emergency
fund ESM, which combinedly cover more than 50% of the total amount involved in
the investigated guarantee-arrangements.
Since the EFSF will not enter
into new lending programs anymore, from July 2013 on, the Dutch guarantee
ceiling for the EFSF can be lowered substantially. As you have seen in the
State Budget for 2014, this guarantee ceiling has been brought back to €49,6
billion from €97,8 billion, from 2013.
My comments: I don’t understand one bit of this statement:
- Either the EFSF has not lended to financial institutions at all and then
there is nothing for the Dutch government to warrant anymore;
- Or the EFSF actually DID lend large amounts of money to EU governments and financial institutions and then the Dutch state is still on the hook for its share of the risk.
Probably some lending programs have ended before or during 2013 and then
the reduction of the Dutch guarantee ceiling is justified. However, the latter
does not become clear at all from Dijsselbloem’s reply.
Dijsselbloem: The recommendation of the
Court of Audit, to enrich the risk-analyses with a statement upon the financial
stability of individual institutions and the risks that this institution brings
to the Dutch state budget, goes further than what has been proposed by the
Committee Risk Arrangements. I have some serious objections against this
recommendation.
I am of the opinion that the
indicators, which are used to set up a risk profile in your draft report – availability
of collateral and the status of preferred creditor – will not always lead to an
unambiguous judgment.
My comments: Yet
another strange notion from the Finance
Minister. If a financial institution holds collateral from the borrower and it
has a preferred creditor status, it has a reduced risk profile in comparison
with financial institutions that don’t have both securities in place.
Of course, it is the quality of the collateral that counts, but having
it is always better than having none at all. And the difference between being a
prefered creditor or not, is like the difference between being first in line or
last in line at a one-off Rolling Stones concert.
Dijsselbloem: From the absence of ‘risk-reduction
through the availability of collateral’ and a prefered creditor status at the
EFSF, people could jump to the conclusion that the risk-profile of the EFSF is
substantially higher than at the other institutions.
In this matter is relevant,
however, that although the EFSF doesn’t know a formal prefered creditor status,
like the ESM does, in practice the EFSF loans will have a high level of
preference, due to the guaranties that have been supplied to the EFSF by
national governments.
My comments: In plain English: the EFSF will get its
money back, due to the guarantees supplied by the national governments in the
EU. These governments will enforce that the EFSF gets its money first in case
of a default or bankruptcy, even if it doesn’t have a formal right to it.
Well, I am curious how the official prefered creditors of the financial institutions
needing EFSF funds, will react to this ‘statement’ by Finance Minister Jeroen
Dijsselbloem. If I would be such a prefered creditor institution, I would immediately
ask for some extra collateral from the debtor in question and hire a few
lawyers, just in case…
Dijsselbloem: A public judgment upon the
financial solidity of an international instituion, based upon prudential
standards, could have negative consequences for the creditworthiness of this
institution.
This explains why certain boundaries
should be observed in case of capital raises and replenishments of funds for
the investigated international financial institutions, when it comes to the amount
of detail in which the variables of creditworthiness and operational capacity
should be related to prudential ratio’s.
Based upon these considerations,
I am of the opinion, that I should restrain from an all-embracing judgment upon
the financial solidity of a financial institution and its risks for the Dutch
state budget.
My comments: Hush!
Talking about these institutions already makes them weaker.
If you compare the creditworthiness and financial stamina of these
institutions to normal, prudential ratios for normal banks and financial
institutions, people will know / understand that the financial firepower of these
financial institutions is based on too many guarantees from national
governments and too little real money, which is available for funding them.
In other words: these institutions are a
suitcase full of IOU’s, as we know such from the great movie 'Dumb and
Dumber'.
As long as everybody believes that the emperor does have clothes on, then
heck, does he indeed have clothes on: a fairytale will be held for the truth as
long as most people are willing to believe it.
However, when a ‘darn young boy’
questions the invisible clothes of the emperor – in this case the creditworthiness
of these financial institutions - , than the emperor (aka the financial institutions)
might be exposed forever.
Finance Minister Jeroen Dijsselbloem decided to ‘forever hold his peace’
about the suitcases full of IOU’s, which the mentioned
financial institutions are, in my humble opinion.
And that is not a very comforting thought, as you
know my adage: ‘State guarantees don’t cost the tax-payer one cent…, until they
do’.
Finding your way in the Alphabet Soup:
- ECB - European Central Bank
- ESM - European Stability Mechanism
- EFSF - European Financial Stability Facility
- EFSM - European Financial Stabilization Mechanism
- EIB - European Investment Bank
- IMF - International Monetary Fund
- EBRD - European Bank for Reconstruction and Development
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