AMSTERDAM (MNI) – The Netherlands must reduce its public deficit,
even at the cost of economic growth if it wants to retain the
confidence of foreign investors and domestic consumers, ECB Governing
Council member Klaas Knot said Friday.

“The US can afford to loose its triple-A without having a major
effect on spreads, but it’s different for Netherlands,” the governor of
the Dutch central bank told university students here. “We are a small
economy. If we lose our triple-A, it will have effect on spreads.”

“The Netherlands has to get its budget deficit back to 3%” of GDP
— “not because Brussels demands it, but because it’s necessary,” Knot
stressed. Cutting the deficit “will cost economic growth. But no cuts
will mean less foreign investments and less spending by consumers,
because they will lack confidence in government.”

For now, financial markets appear primarily focused on the southern
tier Eurozone countries, where the lack of competitiveness remains a
fundamental problem, Knot observed. But the situation is not as
dangerous as last November “when we were looking into the abyss,” he
said.

Spain is taking right measures, but communication on its moves has
been “awkward,” he said. “Markets are overreacting” to the situation in
Spain, he said, asserting that “there is no need for ECB to buy Spanish
bonds.”

Indeed, Knot welcomed the fact that the ECB has been able to leave
its bond-buying program dormant in recent weeks. “I don’t think
buying bonds is the solution in the end. We need fundamental measures.”

So far, the ECB’s long-term refinancing operations have not spurred
a rise in lending or the money supply, he observed. “So there is zero
danger of high inflation.”

In the Netherlands, it is the huge private mortgage debt that is
spooking the markets as a potential threat to financial stability, Knot
explained, reiterating his appeal to the government to revisit the
fiscal incentives that encourage home buyers to take on big mortgages
that exceed the value of their homes.

In light of pending reforms to the pension system, which will shift
more of the risk of asset losses onto employees and pensioners, the
central banker urged pension funds to avoid too optimistic estimates of
future returns on investment.

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