Rating Agencies Should Not Overreact to Dutch Problems

This year, the Netherlands celebrates ten years of political instability. In 2002 the first Balkenende Cabinet collapsed after just 86 days in office. Internal conflicts within the populist LPF party destabilized the government. After the fall of Balkenende’s government, nobody nervously watched the reaction in the bond markets or anticipated rating downgrades. This time is different. The collapse of the Rutte Cabinet was immediately followed by an increase in bond yields and warnings by Moody’s and Fitch.

Is the Netherlands today worse off than ten years ago? Hardly. Despite the credit crisis, Dutch per capita GDP is 10% higher than in 2002. Public debt and mortgage debt have increased, but so have Dutch assets. The international investment position of the Netherlands has increased from € -113 bln in 2002 to € +224 bln in 2011. Dutch pension assets have grown during this period from € 435 bln tot € 870 bln. This huge increase in wealth befits a country that has seen trade surpluses year after year.

Fitch has warned that the Netherlands may loose its AAA-rating when the public debt continues to rise. This is typical for the current fixation on debt. Unlike Fitch, the IMF recognizes that a balance sheet has two sides. The IMF’s recently published Global Financial Stability Report includes data on the net general government debt, which results when financial assets are subtracted from gross debt (Table 2.1, GFSR, p. 23). Moving from gross to net debt figures reduces the Dutch public debt ratio from 70.1% to 36.0% of GDP. This is the lowest percentage in the euro area (bar Luxemburg) en puts into perspective the urgency to reduce the budget deficit to 3% in 2013. The Netherlands is one of the few countries where moving from gross to net figures makes a big difference, due to the funded nature of the pension liabilities of civil servants. Any rating agency should conclude from these data that the Dutch financial position is extremely solid and that concerns about creditworthiness are overblown.

Yet not all is well. The crisis has transformed the euro area from a safe haven into a source of instability which may endanger even the most solid economies. And the political instability, which in 2002 still seemed to be a temporary aberration, may turn into a permanent feature of Dutch politics. This also makes it difficult to agree on a convincing answer to the economic challenges.

The ‘Catshuis’ budget measures from which Geert Wilders walked away, were mainly aimed at cutting spending and increasing government revenues, fast. The zero wage growth and VAT-increases would weigh down heavily on private consumption in the years to come. Big structural reforms in the labor market and the housing market were lacking. The ‘Catshuis’ measures would therefore have a strong procyclical effect and do little to increase the growth potential of the Dutch economy. Even a rating agency should not have embraced this uneven austerity package.

A new coalition will have to find a better balance between austerity and reform. Given the Dutch luxurious net debt position, a rush to cut spending and increase taxation to meet the 3% target in 2013 would be unwise. In the meantime, financial markets and rating agencies may remain nervous about the political uncertainty in the Netherlands. But it is hard to see how Rutte’s unimaginative and procyclical package would have strengthened the Dutch economy.