I am going to make this one quick but I thought it was necessary to call attention to this issue because it highlights how opaque the banking landscape in North America and Europe presently still is. Nationalised Dutch lender SNS Reaal, the fourth largest bank in the Netherlands, has recently been nationalised despite a reported 13 percent Tier 1 capital level in the most recent round of banking stress tests in Europe (pdf here). Clearly, the stress tests weren’t particularly stressful. I would go so far as to say they were ‘phony’. As Citi Chief Economist Willem Buiter warned in the Dutch press last month, more writedowns are unavoidable, especially if house prices in the Netherlands continue to decline.
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And note that Buiter was talking about prices falling another 20% in the Netherlands. We should be watching events there closely because the Netherlands is in the core of Europe and these events point to private debt stress in the Netherlands, where the levels are the highest in the whole euro zone. I would expect that stress to be reflected in larger than expected fiscal deficits and the concomitant austerity that is now Europe’s fiscal policy choice in dealing with them. As always, Europe’s macro economic outlook is weak.
Note however that there is an increasing possibility of backloading this austerity because of the difficulties so many countries are running into in meeting their targets.