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 since – say – 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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