Dutch Safety Threatened as Voters Ponder Austerity: Euro Credit
Investors were so concerned about protecting their money from the European debt crisis last month they paid to hold Dutch government notes. An election this week is now raising questions about that status as a shelter.
The securities underperformed AAA-rated peers in Germany and Finland this month as the lead of Prime Minister Mark Rutte’s pro-austerity Liberal Party narrowed in polling before the Sept. 12 vote. After slipping to less than zero in August, Dutch two-year yields climbed last week to the highest level in more than two months.
“Over the next few weeks, Dutch bonds could struggle just purely on the risk that the election doesn’t produce a clear outcome or produces the wrong outcome,” said Padhraic Garvey, head of developed-markets debt at ING Bank NV in Amsterdam. “Ultimately it will be okay, but there could be a bit of nervousness over the next couple of weeks.”
As one of the euro area’s four countries that still has a AAA grade from the three biggest credit rating companies, demand for Dutch debt survived the collapse of Rutte’s government in April as investors focused on the nation’s relative fiscal strength as a haven from Europe’s market turbulence. Prolonged talks on a new coalition may delay planned cuts to the budget deficit, with polls showing the election is too close to call.
Garvey recommends investors choose Austrian bonds over their Dutch counterparts as they await the elections results. The extra Austrian yield over Dutch bonds narrowed to 21 basis points from 32 on Aug. 31.
Dutch 10-year rates jumped 35 basis points since falling Aug. 2 to the lowest level since June. That left the extra yield, or spread, that investors demand to hold the debt instead of 10-year German bunds at 33 basis points, albeit still less than half the three-year high of 79 basis points in April.
“Any political instability resulting from the election could take the spread versus Germany back to the April-May level,” Elaine Lin, a strategist at Morgan Stanley in London, wrote in a client note on Sept. 6. “The underlying structural and cyclical weakness of the economy could undermine investor confidence in the Netherlands versus Germany in the long run.”
The country’s two-year notes yielded 0.10 percent at the end of last week, up from a record low of minus 0.035 percent on Aug. 2, which meant investors were willing to lose some of their money in return for the safety of holding Dutch securities.
The Dutch Labor Party, which advocates less austerity and more time for the country to meet its budget-deficit limit as a way to boost growth, cut the gap with the Liberal Party ahead of the elections, a poll by Ipsos Synovate showed Sept. 8. Labor stands at 35 seats, the same as the Liberal Party and 14 more than the Socialist Party, the poll showed. The Liberals gained one seat from the previous poll on Sept. 5, while Geert Wilders’ anti-immigration Freedom Party lost one to 19 seats.
“If you leave the strict austerity policy your economy will grow stronger and that’s what financial markets will appreciate,” Diederik Samsom, Labor leader, told Bloomberg yesterday at a party meeting in Drachten, northern Netherlands.
The D66 party has 13 seats. A so-called purple coalition of Labor, the Liberal Party and D66 would become possible with 76 seats of 150 seats in parliament. NOS television cited an Ipsos Synovate poll on Sept. 6 in which the Liberals had 34 seats with Labor trailing by two seats.
“As it looks right now, there’s a strong possibility that we could see protracted talks and that may create, especially in the current environment, more uncertainty,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “There’s clearly a chance that Dutch bonds will underperform, but we also think that with yields or spreads going much higher it could easily impact on the decision-making and speed up the process of bringing the parties together.”
Declines by Dutch bonds may be temporary as the nation keeps its finances under control and nurses an economy that emerged from a recession this year, said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. The government is forecasting a 2013 deficit at 2.7 percent.
“Of course when you have uncertainty some investors might step to the sidelines a bit until that uncertainty is out the way and the money will come back again,” von Mehren said by telephone. “With the debt levels and budget deficit, the Netherlands should still be a safe haven.”
Under the Dutch electoral system, shares of the vote translate directly into seats in parliament, with 0.67 percent of the nationwide vote enough for a seat.
Glut of Parties
That can lead to a glut of parties in parliament, meaning it could take months for a coalition to be formed, prompting investors to question whether the country can deliver on its pledge to keep its budget deficit below 3 percent of gross domestic product, the original ceiling for joining the euro.
The Socialists, led by Emile Roemer, oppose more spending reductions and refuse to hand over more sovereignty to Europe, while the Freedom Party, led by Geert Wilders, seeks an exit from the European Union and the euro.
Elections were called after Rutte’s cabinet resigned on April 23, when Wilders, who had been backing a minority government of Liberals and Christian Democrats, withdrew support for spending cuts and tax increases. Rutte won support from opposition parties for an austerity package three days later.
“Unless we get a big surprise package in power, I think it will be okay,” said Garvey at ING. “You just never know.”