The Dutch press is reporting that Willem Buiter, the Dutch-born Chief Economist of Citigroup, believes that we are going to witness a slew of writedowns in the Netherlands unless the Dutch can right the economy and stop the fall in house prices.
Buiter expects that writedowns will be unavoidable if prices fall further, for example by 20%. “Or if the recession continues for another year – as expected. Then the political pressure (writedowns of outstanding debts, etc) will therefore be bigger,” Buiter said in an interview published this morning in the Financieel Dagblad.
‘As regards the economic arguments, it will be difficult to resist. Already, 800,000 households are underwater. If prices fall another 20%, that’s a million,” said the economist.
Criminal fiscal policy
The big problem is that, according to Buiter, the Netherlands for years has pursued a fiscal policy that has greatly encouraged the accumulation of mortgage debt. “The Netherlands has the most amazing system of mortgage financing in the universe.”
Buiter: “That you could take a thirty year repayment mortgage with full interest deduction – and at your marginal tax rate, while also keeping a separate savings account to save tax-free money to repay the principal is a double deduction. That is households are asked to stuff themselves full of debt. It is criminal, certainly in mortgages for households because they are in many cases especially for people who can barely count their ten fingers. “
For an economic recovery, a reduction in the indebtedness of households would be desirable in the eyes of the Citigroup economist. “Excessive debt acts as a tax on new lending and on borrowing behavior. Household spending is depleted even if their net asset position is in a positive state. Houses are illiquid and difficult to sell, while the debts look ugly and continue to be repaid each month. The problems in housing hang like an albatross over consumer confidence.”
The writedown of mortgage debt should happen not simply through cancellation of the remaining debt according to Buiter. There is also the thought that the bank would receive an equity share in the property. “The bank also has a part of the “upside” as prices recover in the future.”
That is my translation from Dutch. Interesting comments from Buiter, essentially calling for a partial debt jubilee along the lines of Steve Keen. It tells you that the problems run deep – and it’s not just Spain and Ireland, but the Netherlands, Denmark and soon France.
Source: Het Financieele Dagblad