Dutch Prime Minister Mark Rutte is likely to try to strike a budget deal with opposition parties that meets European Union fiscal targets before holding early elections after Geert Wilders’ Freedom party withdrew support for his minority government.
Negotiations among Rutte’s coalition members to find 9.5 billion euros ($12.6 billion) of additional cuts in the 2013 budget collapsed yesterday when Wilders objected to proposed social security reductions. General elections should take place “the sooner the better”, Wilders said, as his party no longer supports the government.
The political and budgetary uncertainty may push yields on Netherlands bonds higher and are likely to complicate Dutch efforts to maintain the AAA credit rating that France and Austria lost in January. The situation emerges at the same time as concerns with Spain’s fiscal position and banks have reignited Europe’s debt crisis.
“There is the potential that this will lead to higher spreads and higher interest rates,” Sweder van Wijnbergen, professor of economics at the University of Amsterdam, said in a telephone interview yesterday. “We’re not like Italy yet but we need a clear and long-term vision on how to deal with our government finances and that will take some time,” Van Wijnbergen said.
Premium to Bunds
The risk premium demanded by investors on Dutch government debt has been creeping back to the highest level ever since the budget talks started March 5. The risk premium to own Dutch 10-year bonds relative to German bunds expanded to 60.3 basis points April 20, up from 44.9 basis points March 5, according to data compiled by Bloomberg. The spread reached it highest in five months -- 60.7 -- on April 10, according to data compiled by Bloomberg.
The yield on Dutch 10-year bonds was 2.31 percent on Friday, April 20, compared with 1.71 percent for Germany, Italy’s 5.64 percent and Spain’s 5.91 percent.
To resolve the current situation, the government plans to propose measures for bringing the budget deficit within European rules before April 30, Finance Minister Jan Kees de Jager told Dutch news agency ANP yesterday. “For the implementation of those measures we will seek a majority in parliament,” ANP cited De Jager as saying.
The opposition Labor Party is willing to cooperate with the government on preparing a complete 2013 budget only if elections are held in September, party leader Diederik Samsom told NOS television yesterday. “The budget for 2013 will be very complex and only can be done with a government that has a caretaker status,” Samsom said.
The nation last held a general election in June 2010 and the next one wasn’t due to be held until 2015.
The Dutch 2013 budget shortfall is currently forecast at 4.6 percent of gross domestic product. Rutte aims to pare it to a European Union limit of 3 percent in that year.
Rutte said he will meet with both his cabinet and Queen Beatrix to discuss the political situation tomorrow.
Dutch debt has underperformed Germany’s and Finland’s for the year and for the month, according to data compiled by Bloomberg. The Dutch economy entered its second recession in three years during the second half of 2011 and unemployment increased from 5 percent to almost 6 percent in 12 months.
Standard & Poor’s on Jan. 13 changed the outlook for the Netherlands to negative as it sees at least a one-in-three chance that the rating will be lowered in 2012 or 2013 if the economy further deteriorates.
“Until this year its AAA rating was one of the more secure European AAA ratings,” Chris Pryce, a director at Fitch Ratings, said April 19. Fitch has a stable outlook on the Netherlands which it will review in the next months. “If the Netherlands’s policy doesn’t change, it could be argued, I’m not saying it will happen, it could be argued that this would involve a negative outlook.”
The costs for the Netherlands of losing its top credit rating would be high, European Central Bank Governing Council Member Klaas Knot, who also heads the Dutch Central bank, said April 13 at the University of Amsterdam. “If we would lose our AAA rating, it could lead to 100 basis points extra interest rate on our government debt and to 4 billion euros of extra interest costs annually,” Knot said.
“This is surely putting in danger the credit rating but that is not our fault,” Labor’s Samsom said in a televised interview yesterday. “We can blame Rutte for this because he wasted his time with those negotiations,” Samsom said.
The Liberal Party, led by Rutte, would win 37 of the 150 parliamentary seats if general elections were held now, according to an April 19 Ipsos Synovate poll. That’s up 6 seats from the number the party currently holds. Seats held by the Freedom Party would drop to 18 from 24, while the second governing party, the Christian Democrats, would lose 9 seats to 12.
“I don’t think the financial markets will get really worried but reforms and budget cuts are essential,” Arnoud Boot, professor corporate finance and financial markets at the University of Amsterdam, told NOS television in an interview yesterday. “The Netherlands eventually will come with an austerity package,” Boot said.