Ireland appears to have limited options in undertaking any further austerity measures, if the country wishes to avoid the complete destruction of its domestic market (internal demand) – while at the same time it needs to meet its deficit reduction goal for the year 2013; reductions of 3.5 billion euro’s are needed.  The country’s economic growth rate for the year 2012, is projected at 0.7% and is not believed to improve due to weak domestic demand, coupled with restricted exports (due to the current debt crisis).

With its unemployment rate at 14.80% and without any sign of a possible reduction in the foreseeable future, Ireland's deficit will reach -7.5% in the year 2013 – hurtfully high levels for a country that continues to suffer from a real estate and banking crisis (although supported by American and other companies that have settled there to facilitate their export rout to Europe, having been enticed by the low tax rates).

On the other hand, it is also impossible for Spain to achieve its lofty goals, according to the IMF – while at the same time the country is delaying its request to enter the ESM, to avoid control from its creditors. Spain’s budget deficit will most probably exceed -7% in 2012 (compared to what the Spanish government hoped to be -6.3%, while Spanish economists expressed a more pessimistic -9.4%). For the year 2013, the IMF estimates indicate a drop to -5.7%, up significantly from the Spanish prediction of -4.5%.

The announcement made by the Spanish prime minister to save 40 billion euro's (via reductions in spending and an increase in tax income) will most likely worsen the current situation  as it will intensify the recession and increase unemployment, pushing the country to its limit. Therefore, it will soon replace Greece, taking the reins of the euro-zone debt crisis – dragging along Portugal (to some extent), which also faces major problems, but manages to stay off-stage.

However, the euro-zone country facing the greatest problems (outside the euro-zone, Great Britain faces the greatest problems and will soon have to face a stormy situation) is the Netherlands – although it has, so far,  managed to avoid bad press.

Outside of Europe and the US (a country that could solve its huge public debt and deficit problems if it would simply increase the tax rate for the wealthy – given the enormous valuation of private property, well above US$ 38 trillion, compared to US$ 15 trillion of public debt), the biggest problems are observed in Iran, which faces a coordinated economic attack on a global scale.      

The results of this attack are the shrinking of Iranian energy exports by 50%, the free fall of its currency (devaluation), as well as the magnifying effect on inflation – in combination with an escalating food crisis, which has led to a major social upheaval.

THE DUTCH DISEASE

In general, the problem of the Netherlands is rising unemployment, as well as the escalating bad debts of banks, coupled with the bursting of the property/housing bubble. Before the burst, the housing prices had followed a steep upward trend since 2001, fuelled by the then new law that allowed Dutch citizens to deduct the interest of their mortgages from their taxable income.

The deduction of interest from taxable income (which was adopted in order to encourage mortgages for the construction of new homes) eventually worked as an incentive for the creation of ever-increasing debts by businesses and households.

In particular, like in other countries (USA, Ireland, Spain), the Dutch citizens not only took on debt to buy their own homes; they borrowed money to consume, using their homes as collateral – in order to benefit from government subsidies in the form of tax breaks.

The result of this ten year long process was excessive borrowing by the Dutch; Holland has the highest level of household debt in the euro-zone. Furthermore, the mortgage debt of the Dutch, relative to Holland’s GDP, is the highest worldwide – a painful lead. (See Table I)

TABLE I: Private (household) per capita debt

Source: FOL 

Table: V. Viliardos

As seen in Table I, the average Dutch household owes nearly three times as much as the average German household and over three times as much as the average euro-zone household. This reality will soon have a major impact on the banking system, and after that, on the public sector.

Specifically, while household debt increased after 2001, the property sector overheated, and therefore, prices continued to climb. After the outbreak of the financial crisis however, amid fears of a recession and rising unemployment, prices fell by 8% in just one year – while the number of new building permits is now the lowest since 1953. Meanwhile, construction business bankruptcies soared 44% in the first half of 2012.

The properties for sale today are estimated to be 221.000, up from 150.000 a few years ago, and with prices in certain areas lowered by more than 20%. In general, there are twice as many properties for sale in the Netherlands (per capita) compared to the U.S. – a country that has been suffering a prolonged real estate crisis.

This leads us to the conclusion that the Netherlands will soon have to face a real estate crisis of its own, the size of which will be greater than that in Spain – despite the fact that unemployment is relatively low (6%), but increasing steadily.

Already, according to international analysts, 20% of the Dutch live in homes that lost value to such an extent that mortgage payments are too expensive compared to the value of homes – a situation that is similar to that of the U.S.

This situation will obviously create enormous problems for the banks – with Rabobank having to face an increase of its bad debts by 75% in the first six months of 2012 (a total of 1.1 billion euro's). The same applies to ABN Amro, with the specialized company Arcadis calculating the additional bad debts of the bank to be 37 billion euro's.

The total mortgage debt of the Dutch is around 640 billion euro's (when Greece’s public debt* is around 290 billion euro's) – against which the private deposits of the Dutch are just 332 billion euro's.

This means that the Dutch banks must finance the difference (308 billion euro's) from abroad – resulting in enormous dependence on the international financial markets. With the country’s GDP at around 650 billion euro's, the total (mortgage) debt of households is scary; nearly 100% of GDP.

According to a professor of Finance, "The situation in the Netherlands is disturbingly reminiscent of that of Ireland and Spain. We are facing an extremely large private debt, a terrifying real estate bubble, and gigantic defaults (bad debts) on banks, against which absolutely nothing has been done".

Moving on, if the real estate bubble bursts, it will have a major impact on public debt, which is currently reasonable; four out of five mortgage loans (80%) are guaranteed by a state development tool (national mortgage guarantee). Under this tool, if any citizens do not pay their loan installments, the state is obliged to take them on/to bear the expenses – a real megaton bomb in the foundations of the Dutch government.

According to an expert, there was the (illusory) impression that the state could secure (by law) the stability of property prices! This impression was created by the fact that the state guarantee on loan defaults ensured property developers low interest rates for a long time – a practice that today poses a great risk to the credit rating of the entire country, which currently is still AAA.

The Dutch government, always according to FOL, now wants to avoid/reduce the risk by eliminating the subsidies – a move that could prove disastrous for the already unhealthy real estate market.

Especially when the growth rate of the Netherlands, a country with a budget deficit (-4.7% of GDP in 2011), and external debt in the amount of US$ 1.1 trillion, heavily dependent on exports to Germany (26.2% of total exports), dangerously slows (0.3% last quarter).

EPILOGUE

As we can see, there are several countries with major problems – both within the euro-zone and outside of it. However, only Greece seems to be in the eye of the storm, confronting, among other things, continuous attacks from all sides, as well as incredible attempts at humiliation.

Greece, on the one hand, is being used as an experimental subject for the imposition of the new order of things, and on the other hand as protective smoke (a decoy) for all the powerful countries that confront much bigger problems – something of course that will be proven.

* We have ecxluded the amount of bank recapitalization

Athens, 26.10.2012

Translation of original: Dennis Viliardos

Sources: Focus (FON), Arcadis  

viliardos@kbanalysis.com     

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    Vassilis Viliardos is an Economist and an Author of several books on the Greek economic crisis. He has earned his Economics degree in ASOEE (Greek University of Economics) and in Hamburg, Germany.  He lives in Athens, Greece.