Chart of the day: Contagion spreads to the Netherlands
Yesterday, I showed you that contagion had spread and default probabilities were blowing out right across Europe. Every single name on the list for sovereign credit default wideners was European and names like Austria, Estonia, and Slovakia showed marked deterioration, with default probabilities over 10%.
Today is no different. The Netherlands is the notable credit to deteriorate today. Their default probability has just crossed the 10% threshold. Take a look.
At the risk of repeating myself, I have to note that this is a rolling crisis through the euro zone. It will eventually infect every country until we get a systemic solution: full monetisation and union or break up. The longer the ECB waits, the worse things will get. No euro zone sovereign bond is safe.
Source: CMA
Update 1455 EST: There’s nothing wrong with the Netherlands. It’s indiscriminate selling. Warren Mosler reported this morning that he received this message from a AAA bond trading desk:
Our Trading Desk reports “mayhem” in the AAA Eurozone markets
– France 11bps wider
– Netherlands 6bps wider
France now 178bps over Germany
Increasing talk/fear of Eurozone break up and capitulation trades in AAA markets are widespread.
We are seeing no real demand for anything – even Germany.
Tomorrow’s Shatz auction looks a big ask with a yield of 30bps and no risk appetite out there.
These are not high yield punters here. They are AAA bond managers who thought they were buying safe assets. Because of the sovereign debt crisis, no eurozone sovereign bond is safe. So now there is panic.
You might want to reconsider that nothing is wrong with the Netherlands. There is a huge housing bubble in the Netherlands that has not popped yet with the highest morgage debt per capita on the planet. The volume of house sales has crashed but prices have only dipped a little. It’s all extend and pretend with the banks avoiding auctioning the houses with delinquent morgages, i.e. shadow inventory. The banks and the govenment are all in into maintaining the status quo because when it pops we’ll have another Ireland / Iceland type of situation: a large part of morgages underwater and a collapsed financial sector that is huge compared to the host economy and which will effectively devastate it’s ‘real’ economy.
I know about the rise in house prices. It’s same thing in France and Finland (as well as in Sweden and Denmark outside the euro zone and in Canada and Australia outside of Europe). But really, it doesn’t get better than the Netherlands for sovereign balance sheets in the world’s largest developed economies. In a Depression, we all take hits though.
Cullen Roche thought I was being dramatic here by talking about this as contagion at all.
https://twitter.com/#!/PragCapitalist/status/136491735084838912
You think I’m not being dramatic enough!
The fact that the Netherlands banks are not on the watch list of most analysts shows that they are a problem just waiting to happen. The dutch housing market is probably the most overvalued in the world and unless the banks had increasing deposit requirements as the bubble increased I would expect large losses at some point. With low growth the sustainability of such high prices is very small.
You might want to reconsider that nothing is wrong with the Netherlands. There is a huge housing bubble in the Netherlands that has not popped yet with the highest morgage debt per capita on the planet. The volume of house sales has crashed but prices have only dipped a little. It’s all extend and pretend with the banks avoiding auctioning the houses with delinquent morgages, i.e. shadow inventory. The banks and the govenment are all in into maintaining the status quo because when it pops we’ll have another Ireland / Iceland type of situation: a large part of morgages underwater and a collapsed financial sector that is huge compared to the host economy and which will effectively devastate it’s ‘real’ economy.
I know about the rise in house prices. It’s same thing in France and Finland (as well as in Sweden and Denmark outside the euro zone and in Canada and Australia outside of Europe). But really, it doesn’t get better than the Netherlands for sovereign balance sheets in the world’s largest developed economies. In a Depression, we all take hits though.
Cullen Roche thought I was being dramatic here by talking about this as contagion at all.
https://twitter.com/#!/PragCapitalist/status/136491735084838912
You think I’m not being dramatic enough!
The fact that the Netherlands banks are not on the watch list of most analysts shows that they are a problem just waiting to happen. The dutch housing market is probably the most overvalued in the world and unless the banks had increasing deposit requirements as the bubble increased I would expect large losses at some point. With low growth the sustainability of such high prices is very small.
This is a quote from a 2007 report from the biggest Dutch morgage bank (Rabobank):
“High debt quota no direct threat to the housing market The rising level of mortgage debt and related ratios do not pose a direct threat to the Dutch housing market. The emergence of innovative mortgage products as well as government interventions have expanded the financing scope of house-buyers in recent years.”
https://www.rabobank.com/content/images/Q07-I-Eng_tcm43-96566.pdf
Scary stats:
Dutch morgage debt to GDP ratio > 100%
LTV of new morgage loans > 110%
Here’s a link to an Aussie perspective on the Dutch property bubble:
https://www.macrobusiness.com.au/2011/06/dutch-show-how-not-to-run-housing-policy/
Quote:
“Another bubble factory?Like the UK housing market, Netherlands housing appears to be particularly prone to bubbles and unaffordable housing. Dutch households are encouraged to borrow big for housing via deductible mortgage interest, direct Government subsidies to first home buyers and lower income earners, and the dysfunctional rental system. And Dutch banks are only too happy to lend, with a large proportion of the banks’ mortgages guaranteed by the Government.At the same time, the straight jacket placed on land/housing supply ensures that the extra demand emanating from the above policies will manifest itself in rising prices instead of new home construction, and would likely contribute to steeper price falls in the event of a negative demand shock.”
Apologies for the big quotes and all but I think the issues facing the Netherlands have been just below the radar up till now. Probably due to the flood of all the other bad news from Europe.
@Dutch Steve, also see this Dutch article going out in the links today. It captures the whole sub-prime nature of the lending:
https://www.huizenmarkt-zeepbel.nl/15-11-2011/300-000-subprime-hypotheken-zijn-groot-gevaar
The Irish public debt was also quite small before they bailed out their banks…
The Dutch central bank expresses itself in more dramatic terms than you ;)
Quote (Nov 2nd):
“Conditions in the Dutch housing market are difficult. Falling house prices are magnifying the financial risks for households and banks. At 128 per cent of GDP, households have virtually the highest debt position in the world, with high loan-to-value ratios (the amount borrowed relative to the value of the collateral). They are hence vulnerable.
…
The Netherlands has a large financial sector that fits its open economy, but its size also carries risks.”
https://www.dnb.nl/en/news/news-and-archive/persberichten-2011/dnb260859.jsp
The state also guarantees a very large percentage of the morgages issued in the Netherlands via a sort of insurance scheme (with a limit of 350k euro per morgage). When people default due to e.g. divorce or job loss the state picks up the tab when the foreclosure sale price falls short of the morgage amount owed. Currently 90% of morgages (up to 350k) are insured via this ‘NHG’ scheme. The state is directly liable for the potential losses of this giant pool of insured morgages!
Obviously we’re not Greece or anything but we might be a small country but we create world class bubbles!
Wow! Talk about a coincidence – I was just commenting on another post on this site where I used the Dutch as an example…..
Wow! Talk about a coincidence – I was just commenting on another post on this site where I used the Dutch as an example…..
@Dutch Steve, also see this Dutch article going out in the links today. It captures the whole sub-prime nature of the lending:
https://www.huizenmarkt-zeepbel.nl/15-11-2011/300-000-subprime-hypotheken-zijn-groot-gevaar