You are here: Markets » Sovereign debt implications for Netherlands are negative for France and Austria too
By Win Thin
Early Dutch elections appear certain now as, contrary to press reports late last week, budget talks collapsed over the weekend with no deal at hand. The cabinet held an emergency meeting Monday, as Liberal Prime Minister Rutte was unable to get a budget deal after the Freedom Party withdrew its support, which the Liberals needed as a minority government. The government has been pushing for more spending cuts after studies suggested that without further austerity, the country’s budget deficit would come in near -4.6% of GDP in 2013 and stay above the -3% limit into 2015. A caretaker government would still need to present budget cuts to meet EU fiscal rules by April 30. The government is doubling down on austerity, with Finance Minister de Jager still pledging “disciplined” budgetary policy despite recent developments. Rutte will meet with Queen Beatrix later today, with early elections likely to be announced.
Polls over the weekend suggest new elections would not produce an easily workable coalition, with the Liberals leading but still needing the support of up to three other parties to govern. This suggests further policy deadlock lies ahead. Furthermore, one poll also showed 57% of the populace opposed to austerity measures. Of course, this brings into question whether the Netherlands can pass the Fiscal Compact, despite being part of the core and a leading proponent of tight budgets and fiscal responsibility. Officials from the opposition Labor Party have suggested they will back a caretaker budget in return for fresh elections within three months. Local press reports suggest elections are unlikely ahead of September, which raises the odds that Fitch will take negative rating action against the Netherlands when the agency meets in June.
Fitch official suggested last week that the typical rating process is for a move first on the outlook to negative, followed by review for possible downgrade, and then an actual downgrade. Clearly, the usual rating agency metrics no longer hold given actions during this debt crisis and Fitch could very well announce a full-blown downgrade from AAA this quarter, well before any new government can come in to try and regain confidence of the markets and the rating agencies. Our sovereign ratings model shows the Netherlands as AAA, but growing political and fiscal risks have pushed the country closer to Austria, which was downgraded by S&P to AA+ and put on negative outlook by Moody’s earlier this year.
Fitch has not been as aggressive as the other two agencies, keeping Austria and France at AAA up until now. As such, its negative comments about the Netherlands are noteworthy and likely signal a harder line by Fitch in the coming months. As a result, we think both Austria and France are likely to come under negative scrutiny by Fitch as well, as we view both as inferior credits to the Netherlands. Furthermore, the uncertain outlook for politics and policy in France now put the nation on par with Belgium in our model, which we (and the agencies) view as a AA/Aa2/AA credit.
Source: Bloomberg, BBH
The Dutch economy is already in recession, shrinking q/q in both Q3 and Q4. Despite following the German model of austerity, the Netherlands is still suffering from debt and deficit issues. Indeed, we continue to believe that the negative feedback loop in the euro zone remains intact, with austerity simply deepening the recession and making fiscal numbers even worse. Spain earlier today reported another q/q contraction in Q1, which seems likely to be reproduced by the Netherlands too. The fact that April euro zone composite PMI came in weaker than expected and below 50 for the third month in a row and seven of the last eight suggests little relief ahead overall for the region in Q2.
The euro has remained resilient, but another test of the 1.30 level seems likely given the more negative news stream out of the euro zone. As we have highlighted in the past, it appears that political risk and economic risk remain intertwined and likely to surprise to the downside in the coming weeks. Dutch 10-year spread to Germany today is at a record high 74 bp, and timing couldn’t have been worse as the Netherlands will auction 2- and 25 year paper Tuesday.
About Win Thin
Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.
No related posts.
Like us on Facebook
Follow Edward on Twitter
Latest Subscriber Posts
- Could the US economy accelerate higher in 2014
- Secular versus cyclical factors in equity markets
- Dealing with confirmation bias in macro analysis at market turning points
- Risk for Greece and European periphery from Ukraine crisis escalation mounts
- Economic and market themes: 2014-04-11 – Greece
- Thoughts on Greek bonds, Asian data and resource gamesmanship
- Edward Harrison’s Ten Surprises for 2014, Update 1
- Some thoughts on Ukraine, part 2
- Some thoughts on Ukraine, part 1
- Amazon’s new TV streaming strategy reinforces its incremental approach
- Relief rally in emerging markets
- European, Japanese, and Ukrainian-Russian deflation
- Economic and market themes: 2014-03-28
- The Chinese credit crisis gets messy
- US policy rates and financial stability
Recent Blog Posts
- Four key reasons for capex accelerating
- ECB Action: Just a Question of Time?
- On Europe’s move toward QE to prevent deflation
- The lower bound of central bank effectiveness
- Ten lessons from Charles Keating on corporatism and control fraud
- On the persistence of inadequate ideas like the money multiplier
- Can the Jobs Data Give the Dollar Another Leg Up?
- The US jobs market is healing
- Jumbos still cheaper than conforming mortgages
- Calm before the Storm?
- Eurozone credit contraction continues
- Emerging Market Equity Allocation Model for Q2 2014
- More Thoughts about Potential for QE from the ECB
- The big disconnect between leverage and spreads
- Interest rates and deflation
Daily Links Posts
- What do negative interest rates do?
- A Short History Lesson On Ukraine and Crimea
- Economic consequences of income inequality
- The BoE’s sharp shock to monetary illusions
- Marc Faber: China’s Malinvestment Unwind ‘Will Be a Disaster’
- Another Short History Lesson On Russia and Ukraine
- What are the differences between QE1, QE2 and QE3?
- Bank reserves and the falling loan to deposit ratio at US banks
- The long decline of the Great British Pound
- Turmoil in emerging markets: What’s missing from the story?
- Four signs of economic slowdown in China
- How money matters: The Old Lady fails to get an “A”
- The Dummy’s Guide to the US Banking Crisis
- Chart of the day: Dow 1928-1932
- On Europe’s move toward QE to prevent deflation
- Chart of the day: US Manufacturing Employment, 1960-2012
- The growing mess which will be left behind by the Abenomics experiment
- US commercial banks’ changing asset mix
- Bitcoin is not a currency
- More on the failure of Abenomics
-  Bitcoin is maturing: Patrick Byrne & Jinyoung Lee Englund on the cryptocurrency
-  Privatization of Space? and Big Banks in Foreign Policy with Nomi Prins
-  Paul Craig Roberts: IMF loans will hand Ukraine over to private banks
- Ann Pettifor on Constraints on Money Creation and Bancor
-  Crowdfunding Commercial Real Estate with Rodrigo Nino
-  Cate Long on Puerto Rico's Bonds: "The smell is worse closer to the poop pile"
-  Big Banks and Political Power with Nomi Prins and Anthony Randazzo
-  Ann Pettifor: Private banks create 95% of UK money
-  Greece-ing up the Euro Engine? Lorcan Roche Kelly and Ann Pettifor on Europe
-  The Death of Money with Jim Rickards