Rather staggering to hear it, but Citigroup no longer thinks the Netherlands is a core european nation or AAA rated. The ability of the dutch to bring its deficit to less than 3% has been seriously dented. It’s not a good sign to see such a strong country struggling but its clear that they have been affected by the woes of the euro. Below is a piece from Citi’s report on the Netherlands as reported by ZeroHedge.
The Netherlands has left the Core of the euro area in our view. We characterize core countries as those with i) a relatively strong fiscal position in both the public and private sector, ii) advocating strict fiscal and structural reform conditionality in return for support measures for weaker EA sovereigns and iii) relatively little reliance of the domestic banking system on Eurosystem liquidity. Consequently core countries get a relatively benign treatment by financial markets even during times of turmoil, and have recently shown above euro area average growth. Furthermore, core countries have in common the skepticism towards extraordinary ECB support for troubled euro area sovereigns and banks. While Dutch general government debt remains much below the euro area average (66% of GDP in 2011 compared to 88% for the euro area as a whole) and the centre-right minority government of PM Mark Rutte and Finance Minister Jan Kees de Jager has long been an advocate of strict fiscal rules in the euro area, the Netherlands no longer seems to satisfy all of our other requirements for Core membership.
The poor performance of the Dutch economy will make it very difficult for the country to reduce its general government deficit below 3% of GDP in 2012, as had been targeted, in our view. As a consequence of the euro area sovereign debt and banking crisis, financing conditions in the Netherlands have tightened, creating pressure on the country’s highly leveraged households, which is likely to lead to further contractions in house prices and domestic demand. As the Netherlands Bureau for Economic Policy Analysis1 (CPB) highlighted in March, large fiscal tightening is required in order to meet the fiscal targets in 2012/13. But the minority centre-right government, which even with support from the extreme-right wing Freedom Party no longer has a majority in Parliament, is unlikely to implement the necessary measures in our opinion. Moreover, in order to secure the Netherlands’ ratification of the fiscal compact treaty, PM Rutte needs the support of the left-wing opposition parties, which are against additional austerity measures in the current environment.
As a result, we expect the general government deficit in the Netherlands to reach 4.5% of GDP in 2012 and 3.4% in 2013, above the EA averages of 3.4% of GDP and 2.6%, respectively. The reliance of Dutch banks on Eurosystem liquidity has also multiplied since mid-2011, along with that of Italian, French and Spanish banks. While we do not expect the Netherlands to lose its AAA rating in the near-term we expect that at least S&P will put the rating on negative outlook and that spreads to Bunds will widen.