Core or not, problems persist

I’m slowly catching up on European news after my break. There are a couple of stories that I mentioned in Q4 2012 that are continuing to cause concern.

Firstly to Cyprus which, as I mentioned back in December, is doing it’s best to imitate it’s bigger sister Greece with a stalling economy and a massive (relative to GDP ) bailout request from the EU. The issue is that this time the IMF seems unwilling to go along with the charade that we saw in Greece and is demanding haircuts and direct ESM re-capitalisation of the banking system,  combined with stricter controls on the Cypriot government. Spiegel has more:

.. there are differing points of view over whether the Mediterranean island nation will ever be able to repay its debts. According to current forecasts, the Cypriot debt load will grow to 140 percent of its gross domestic product (GDP) by the year 2014.

The IMF believes that such a sovereign-debt level is unsustainable over the long term. Internally, they have made it clear that a country’s debt level should not be allowed to exceed 100 percent of GDP at the end of an aid program. To achieve that level, the IMF is insisting that Cyprus be required to adhere to much stricter measures than those being called for by the Europeans.


The IMF is demanding that the ESM step in to save Cypriot banks. Such a scenario would mean that Cyprus would no longer be solely responsible for paying back the €10.8 billion that has been earmarked for the country’s banks. Instead, the European bailout fund would have to share the risk. This would make it possible to put a more positive spin on Cyprus’ debt sustainability figures.

The second IMF demand is for the creditors of Cypriot banks to forego a portion of their claims — a debt haircut in other words. Europe is not unsympathetic to such a move, but would prefer to involve only so-called junior debt holders — denoting those whose debt is prioritized lower in the event of an insolvency. The IMF, however, would also like to see senior debt holders be forced to pay up.

And this is much the same argument that the IMF finally came to with Greece in which it appears to have learnt many lessons about its own failings. As usual, however, northern creditors seem less than impressed with the idea.

But Germany, along with the Netherlands and Finland, aims to prevent this. German Finance Minister Wolfgang Schäuble says that a direct bank recapitalization by the ESM would only be possible from March 2014, at the earliest, once a European banking regulatory agency has been established.

On top of that is the issue of money laundering within Cypriot borders, an out-going President who continues to disagree with the terms of any MoU , and the question of Russian influence over the small country. The inevitable outcome… some more stalling.

The outgoing president of the eurozone finance ministers’ meetings says Cyprus cannot receive a financial bailout before March.

Jean-Claude Juncker said Monday before a gathering of the ministers from the 17 EU countries that use the euro that Cyprus will be discussed but no decision on a rescue package will be taken because negotiations are ongoing.

It feels like the Greek summer of 2010 all over again.

The other story, which I mentioned briefly yesterday, is the continuing slowdown in the Dutch economy led by both European contagion and falling domestic house prices. As we’ve seen in many other nations this is creating what looks to be the beginnings of balance-sheet recession dynamics.

The slump in Dutch house prices continued in December, though the pace of the decline slowed, data from statistics agency CBS showed Monday. House prices in December fell 6.3% from a year earlier, less steeply than in the previous four months, CBS said. In November, house prices dropped 6.8% from a year earlier.

Since peaking in 2008, house prices have fallen 16.6%, returning to their levels of early 2004. The slump is weighing heavily on the Dutch economy as households tighten their belts to pay off their mortgages. Dutch households are among the most indebted in Europe because of their large mortgage debt.

The issue is that 2013 isn’t forecast to be any better.

House prices in the Netherlands, the fifth-largest economy in the euro area, will probably fall as much as 7 percent in 2013, the realtors’ trade group NVM said.

The average house price declined 1 percent to 207,000 euros ($271,000) in the fourth quarter from the previous three months and dropped 6.7 percent from a year earlier, NVM said today. Transactions jumped in the final quarter before the implementation of stricter mortgage rules, the group said.

Adding to the poor data is S&P’s outlook in their recent determination of the country’s credit rating AAA/negative.

The negative outlook reflects our view that there could be a more negative macroeconomic scenario, connected to possible pressures on the Dutch financial sector and the broader Dutch economy caused by the potential for a sharper than currently projected decline in domestic demand and a weakening external environment.

With unemployment steadily rising and GDP looking to be accelerating downwards those risks may well be realised in 2013.

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  1. Looks like the Dutch are suffering from “Australian-disease”… copyright Greconomics 2013.