Dijsselbloem Balanced Budget Vow Shaken by SNS Rescue

The Dutch-government rescue of SNS Reaal NV will put a vow from Jeroen Dijsselbloem, head of the group of euro-area finance ministers, to uphold budgetary discipline to the test days after he got the job.

The Dutch finance minister, appointed for a two-and-a-half-year term as chairman of the eurogroup on Jan. 21, called sustainable public finances a prerequisite for durable growth in a letter to ministers on Jan. 20. He also advocates European rules for unwinding failing banks.

“We are struggling with a budget deficit, partly because of these SNS costs,” Dijsselbloem said in an interview in Dutch television program “Buitenhof” yesterday. “Our financial industry is not yet in order. We have large problems in our housing and real estate markets. So in a lot of ways we are comparable to other countries.”

SNS Reaal, the fourth-largest Dutch lender, was nationalized last week after real estate losses brought the company to the brink of collapse. The move will cost taxpayers

3.7 billion euros ($5.1 billion) as capital is injected into the bank and an earlier aid package is written down. The Netherlands’ budget deficit will widen by 0.6 percentage point in 2013, Dijsselbloem said on Feb. 1.

Economic Forecasts

The government’s central planning agency, CPB, had forecast a shortfall equivalent to 3.3 percent of gross domestic product this year, exceeding a European threshold of 3 percent. The CPB is expected to release new economic forecasts on Feb. 28 and the government will decide on possible budget measures in March, Dijsselbloem said last week.

“At the beginning of March we will be able to oversee all financial breaks and setbacks,” Dijsselbloem said after announcing the rescue. “Based on those, and latest growth estimates, we’ll decide what the consequences are for the budgets of 2013 and beyond.”

The Dutch economy, the euro area’s fifth largest, shrank 1 percent last year, the CPB estimated. The government, led by Prime Minister Mark Rutte, 45, has committed to about 16 billion euros of cuts to bring the deficit below 3 percent.

Some economists say further budget measures after SNS Reaal’s rescue would be a mistake.

“It is completely idiotic to plan extra budget cuts because of the nationalization and I don’t expect it to happen,” Sweder van Wijnbergen, a professor of economics at the University of Amsterdam, said in an interview. “It is a one-off loss.”

Economic Harm

Lowering the deficit in one year would unnecessarily harm the economy, said Bas Jacobs, a professor of economics at the Erasmus University of Rotterdam.

“If the private sector is deleveraging it would be wise for the government to slow down fiscal consolidation,” Jacobs said. “From a macro-economic point of view, not all sectors in the economy can simultaneously deleverage without triggering a collapse in aggregate demand.”

SNS, which acquired ABN Amro Holding NV’s property-finance unit in 2006, has been hurt by losses on real estate loan losses that left it struggling to repay a government bailout and depleted its financial buffers just as regulators imposed higher capital demands.

SNS Reaal failed to meet a Dutch central bank deadline to present a viable plan to handle a 1.9 billion-euro capital shortfall, Dijsselbloem said on Feb. 1.

Systemically Important

The bank is the smallest of four lenders designated as systemically important, or “too-big-to-fail” by the Dutch central bank. ING Groep NV, Rabobank Groep and ABN Amro Group NV are its three largest competitors.

The Dutch for centuries have been among leaders in global trade, giving the nation of 16.75 million people a banking industry that dwarfs the economy. The financial industry measures about 4.8 times gross domestic product, making it one of the largest in the world on that basis, according to the country’s central bank.

The industry’s size was reflected in the cost of bailouts during the financial crisis following the collapse of Lehman Brothers Holdings Inc. in 2008. That year, the Netherlands bought Fortis’s Dutch banking and insurance units and its stake in ABN Amro for 16.8 billion euros. The government also provided aid to ING, the biggest Dutch financial-services company, and Aegon NV at the time, and reimbursed Dutch depositors of Landsbanki Islands hf’s Icesave unit after the firm collapsed.

Taxpayer Burden

In order to limit the chances of burdening taxpayers in future, the Netherlands last year adopted the Intervention Act legislation to allow regulators to transfer banks’ assets and liabilities without shareholders’ approval.

SNS Reaal’s nationalization raises questions about the effectiveness of the enhanced banking supervision and legal tools.

The central bank said in the case of SNS Reaal, the legislation allowed it to transfer assets from the bank or the insurer, while it couldn’t touch the holding company. Its units were too interdependent to rescue one, while leaving the others in the hands of shareholders.

“An important question I still have is when did the central bank realize it had a toy gun rather than a forceful instrument?” Lex Hoogduin, professor of economics at the University of Amsterdam and a former central bank director, said on Dutch radio show “TROS in bedrijf” on Feb. 2. “Did it alert the finance minister that it lacked the instruments?”

Investors Rattled

Dijsselbloem’s actions rattled European investors by wiping out SNS Reaal equity and some subordinated debt holders, while forcing other banks to contribute 1 billion euros in a one-time levy.

The Markit iTraxx Financial Index of credit-default swaps on the subordinated bonds of 25 banks and insurers jumped as much as 15 basis points on Feb. 1, the most since Sept. 26, to a more than seven-week high of 265, according to data compiled by Bloomberg.

Dijsselbloem said his central bank warned him that forcing bondholders to share in the losses would endanger financial stability as Dutch banks’ financing costs could have soared. Almost half of Dutch lenders’ market funding, or more than 400 billion euros, consists of senior unsecured debt, according to the regulator.

Trading in non-exproportionated bonds of SNS Reaal and units including SNS Bank NV and Reaal NV were resumed this morning at 9 a.m. in Amsterdam after trading was suspended last week.

Dijsselbloem advocates introducing European Union-wide rules allowing all bondholders, including senior debt investors, to share in losses when a bank fails.

While Spanish banks could retroactively directly apply for a loan out of the European Stability Mechanism once it is operational, SNS will not be able to do so. Dijsselbloem told Dutch lawmakers in The Hague on Jan. 24 this facility is limited to countries with an aid program.

“Perceived risks increased because of the move” to expropriate subordinated bond holders, said Jan Willem Weidema, an Amsterdam-based analyst at ABN Amro Bank NV. The decision to make other banks contribute 1 billion euros may also have caused “some uncertainty for investors in Dutch financial institutions.”