–Adds Comments From Press Conference On Dutch Deficit, Competitiveness

BRUSSELS (MNI) – The Netherlands cannot afford to take the risk of
delaying austerity measures to cut its 4.5% public deficit, Dutch
National Bank President Klaas Knot said Thursday.

Knot, who represents his country on the ECB’s Governing Council,
also urged Dutch banks to continue efforts to strengthen their capital
reserves.

The fact that the Dutch public deficit is above both the
government’s target and the Eurozone average, and that the deficit and
gross debt ratio are above the EU’s limit, means that “delaying
austerity measures in these circumstances would create unjustifiable
risks,” Knot said in introductory remarks to the Dutch National Bank’s
annual report, released today.

“The crisis has revealed the benefits of a strong and credible
fiscal policy,” he said, noting that the Netherlands still enjoyed the
confidence of investors and was now paying a “lower interest rate on its
government debt than ever before.”

To bring down the deficit, the government should look to trim
spending on healthcare and welfare benefits for disabled people, he
suggested, citing the fact that in the Netherlands government spending
on health is three times as high as in other EU member states and that a
large percentage of people in the Netherlands claimed disability
benefits.

Speaking later at a press conference in which he presented the
central bank’s annual report, Knot said, “no measures to solve the
deficit should be ruled out, and this includes raising VAT.”

“The Netherlands is facing big challenges, and we have a lot to
lose, he warned. “The government deficit is a worry even when we get it
down to [the EU's limit of] of 3%,” because “even with 3%, the overall
debt will grow to an unacceptable 90%” of GDP, he projected.

Knot also noted that the Netherlands has been losing
competitiveness in the world, with a 25% increase in labor costs since
the European Monetary Union was launched in 1999. He projected that
Dutch growth would remain stuck in a feeble range of 1% to 1.5% in the
near future.

The central bank president’s warning on the need to tackle the
country’ public deficit is a loud message to politicians divided over
the issue. The Dutch government has been one of the loudest supporters
of tough fiscal discipline rules for the Eurozone, and the government of
Prime Minister Mark Rutte has committed itself to bringing the public
deficit back within the EU limit, sparking a political crisis in the
country where a number of political parties fiercely oppose the new EU
rules.

Leading officials of the Labour Party, traditionally an ally of the
government on European issues, have threatened to vote against
ratification of the new Eurozone fiscal compact treaty if the government
pushes ahead with plans to bring the deficit down to 3% over this year
and next.

Knot issued a political warning, saying that new Dutch elections
could make it impossible to set the country’s budget course for 2013 in
a timely manner. “We can’t afford another year of delay. And even with a
new government the challenges would remain the same,” he said. “A fall
of [the current] government would affect the [Dutch bond] spreads, most
likely negatively,” he added.

Although Dutch banks are ahead of their international peers in
terms of meeting the risk weighted asset requirement of Basel III, “the
quality of that capital still needs to be improved,” Knot said. “The
banks will need to make continuing efforts through cost reductions,
profit retention and, where possible, new issues, in order to raise
their buffers still further,” said Knot

Commenting on criticisms that higher capital requirements could
depress lending, Knot said that lending had continued to rise during the
recent period of capital raising. A reduction in leverage and in the
size of some banks’ balance sheets was also desirable he said.

Concerns about the impact on lending to small and medium-sized
companies, however, are justified as these businesses are typically more
dependent on bank financing. As a result, further requirements affecting
banks “should be limited in terms of size and timing,” he said.

“The huge size of the total mortgage debt in the Netherlands (110%
of GDP) confronts the banks with funding problems,” he noted.

Mortgage market reforms, which could take decades to bear fruit,
are needed to address the structural problems in the Dutch housing
market, the DNB chief said. He noted that there were also serious
imbalance in the commercial property market.”

Knot slammed a proposal from the European Commission to tax bond
and derivatives trading.

“The unfavourable economic climate means that strengthening the
resilience of banks and maintaining lending deserve priority,” Knot
said. “In this context, we can be brief in our assessment of the plan
for a European tax on financial transactions: it will dampen the
prospects of a recovery in the financial sector, will do virtually
nothing to combat speculative transactions and, unless it is introduced
on a global scale, will lead to undesirable shifts in financial
activities.”

Knot also noted that because of its holdings of sovereign bonds
issued by Ireland, Spain, Portugal, Italy and Greece, the Dutch central
bank had set aside reserves of E463 million against possible losses.
That is against the bank’s profits of E1.2 billion, he noted.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

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