Holland’s AAA at risk with realty ‘in coma’

Fitch Ratings has issued the clearest warning to date that Holland faces losing its AAA rating if it fails to deliver austerity cuts or lets political conflict intrude on economic management.

“The Dutch are on the edge of a negative rating action,” said Chris Pryce, Fitch’s expert on the Netherlands. The first move is likely to be a switch from stable to negative outlook rather than a full downgrade. “We will hold a rating committee meeting in June. They run risks if they keep letting debt rise: a cautious approach would be advisable,” he said.

The warning comes as Dutch property tips into deeper slump, with the inventory of unsold homes nearing South European levels. Household debt is the euro zone’s highest at 249% of income, compared with 202% in Ireland, 149% in the UK, 124% in Spain, 90% in Germany, 78% in France and 66% in Italy — according to Eurostat data from 2010.

The Netherlands is caught in a “negative feedback-loop” as recession and house price falls feed on each other. Building permits have dropped 9% from a year ago, the lowest since 1953. “The housing market is in a coma,” said the Volkskrant newspaper. Maarten van der Molen from Rabobank said home prices have fallen 11% from their peak in August 2008, or 15% in real terms, leaving up to 500,000 people in negative equity.
“We expect prices to drop 5% in 2012,” he said.

The Dutch real estate federation NVM said the picture could be significantly worse if the stamp tax holiday expires in July as planned.

The stock of unsold properties has doubled to 221,000 since 2008 as “Te Koop” signs proliferate on Dutch streets, almost double the declared level in the US on a per capita basis. Low unemployment (4.9%) has kept arrears below Irish, UK or US rates, but job losses are creeping up.

The economic woes are infecting state debt dynamics. Public debt will climb to 76% of GDP by 2015, according to the official Bureau for Economic Policy Analysis (CPB). A €32 billion bailout of ABN Amro Bank has not helped but the chief cause is back-to-back recessions.

Central bank governor Klaas Knot said Dutch borrowing costs would rise by 100 basis points if the country loses its AAA, warning that Holland does not have safe-haven status like the US and risks “losing the confidence” of investors if it pushes its luck.

The Netherlands has been a vocal critic of fiscal excess in Greece but is now in breach of EU rules itself, an unexpected casualty of the euro zone’s contractionary policy mix. Critics cite the troubles in Holland — and Belgium — as evidence that the European Central Bank has been too tight, asphyxiating credit for the whole bloc.  

Premier Mark Rutte is struggling to put together an austerity package before a deadline this week but he relies on support from populist leader Geert Wilders, who has threatened walk out of talks. His Freedom Party calls for a return to the guilder.
Rutte aims to cut the deficit from 4.6% to 3% of GDP, though the official CPB said it would be unwise to treat the EU target as the ‘Holy Grail’ of 3% regardless of circumstances. “This could have a detrimental effect on the economy,” it said.

The International Monetary Fund has also urged caution, saying “automatic stabilisers ought to be unhindered”. It warned that excessive tightening could itself “endanger financial stability”.
Hans Wijers, head of the chemicals group AkzoNobel, said it was more important to hold the fragile coalition together than precipitate chaos by trying to meet an abstract target. “Nobody wants a crisis and new elections right now,” he said.

The central bank said in its Financial Stability Report that the country faces a nasty mix of problems. “The outlook for financial stability in the Netherlands is worrying. Dutch households have almost the highest debt in the world. Declining real wages and rising unemployment are putting pressure on incomes. The steady fall in house prices is weakening their position while also increasing the likelihood of debt problems.”

The report said credit outgrew the deposit base of lenders during the property bubble, leaving banks dependent on fickle capital markets. “Short-term funding may dry up overnight, as in 2008 when the interbank market stalled and again in the summer of 2011. A drop in house prices will compromise the issue of mortgage-covered bonds, while significant loan losses may lead to margin calls by the owners of such bonds,” it said.

The regulator said Dutch pension funds are deeply underwater. They need €90 billion in extra funding to meet future obligations, and $200 billion to restore buffers.

Critics say Holland’s policy of full tax deductibility on mortgages as well as loan-to-value caps of 112% (with stamp tax) encouraged a debt spree along Anglo-Saxon lines. The country has less monetary flexibility to cope with the consequences, though it has other strengths.

Fitch Ratings said the Netherlands has the cushion of a current account surplus above 7% of GDP and a history of credible governments. “The country has been run for a long time by sensible parties and this allows us to be a bit more generous.”

“Geert Wilders has not been irresponsible in fiscal policy, but if a situation arises where his presence is no longer compatible with stable government, we would expect the other parties to draw the proper conclusions,” said Pryce.