Citigroup Says Dutch No Longer Part of Euro-Area Core

The Netherlands, the fifth-largest euro economy, shouldn’t be counted in the core of the common currency as its borrowing costs climb, Citigroup Inc. said.

“The poor performance of the Dutch economy should make it very difficult for the country to reduce its general government deficit,” Juergen Michels, chief euro-area economist at Citigroup in London, and three other economists said in a March 23 note to investors. The Netherlands is in a weaker position than Germany, Finland and Luxembourg, he said.

Prime Minister Mark Rutte’s minority coalition must find at least 9 billion euros ($12 billion) in budget cuts this year, equal to 1.5 percent of gross domestic product, to meet European Union deficit rules by 2013 and protect the top credit grade that France and Austria lost in January. The Dutch budget shortfall is forecast at 4.6 percent of GDP in 2013, exceeding the 3 percent EU limit for a fifth year.

“Financing conditions in the Netherlands have tightened, creating pressure on the country’s highly leveraged households, which is likely to lead to further contractions in house prices and domestic demand,” Michels said. The Dutch economy entered its second recession in three years during the second half of 2011 and unemployment has risen for two quarters to 6 percent.

Bond Spreads

The risk premium demanded by investors to own Dutch 10-year bonds relative to Germany’s has more than doubled since January. Dutch yields surpassed those of AAA rated Finland last month for the first time since August. The spread between Dutch and German yields was at 57.7 basis points, or 0.577 percentage point, as of 3:04 p.m. in Amsterdam, from 58.3 on March 23.

“The Netherlands will lose its AAA rating if there’s a cabinet crisis and that will cost the state and companies billions of euros,” Bernard Wientjes, chairman of the employers organization VNO-NCW, said in a television interview yesterday. “We quickly need to take measures that strengthen the basis of the economy.”

Rutte’s minority government risks becoming more dependent on opposition parties after a lawmaker quit Geert Wilders’s Freedom Party. The ruling Liberals and Christian Democrats, together with the Freedom Party, now have only 75 of the 150 seats in the lower chamber. While the Freedom Party backs the Cabinet on most topics, Rutte relies on the opposition Labor Party to back his European policy as Wilders opposes further financial aid to euro countries.

AAA Rating

“While we do not expect the Netherlands to lose its AAA rating in the near term, we expect that at least S&P will put the rating on negative outlook and that spreads to bunds will widen,” Michels said, referring to Standard & Poor’s.

The Dutch Finance Ministry never comments on the country’s rating, spokesman Niels Redeker said by telephone today. Separately, Finance Minister Jan Kees de Jager canceled his regular Tuesday interviews with Dutch television channel RTLZ pending the austerity negotiations between the Liberals, Christian Democrats and the Freedom Party that started March 5.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE