NETHERLANDS: SUBPRIME CRISIS EFFECTS LIMITED

UNCLAS SECTION 01 OF 03 THE HAGUE 002053 SIPDIS SENSITIVE SIPDIS STATE FOR EUR/WE (TSMITH),EEB/IFD USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT TREASURY FOR IMI/OASIA/VATUKORALA PARIS ALSO FOR OECD USEU FOR BARBARA MATTHEWS E.O. 12356: N/A TAGS: ECON EFIN EINV PGOV NL SUBJECT: NETHERLANDS: SUBPRIME CRISIS EFFECTS LIMITED THE HAGUE 00002053 001.2 OF 003 REFTEL: A) THE HAGUE 1967 B) THE HAGUE 1836 THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY. ¶1. (SBU) SUMMARY. The Netherlands' biggest banks have until now been largely unaffected by any spillover from the U.S. subprime mortgage crisis. Any damage appears to be limited to two medium-sized financial institutions -- the NIBC and Hiax fund, with the NIBC ultimately falling prey to a take-over by a foreign bank. While the current international financial crisis has yet to affect the overall Dutch economy, it has generated GONL discussions about the potential for failure of financial institutions with cross-border European operations and GONL and Central Bank liabilities in such cases. There have also been calls for closer oversight and regulation of the Dutch financial sector to prevent any future fallout. Meanwhile, the Dutch financial sector's 2007 final/fourth quarter results may be the first real indication of whether the Netherlands has weathered the current crisis. END SUMMARY. BIGGER BANKS LARGELY UNAFFECTED, FOR NOW -------------- ¶2. (U) The Netherlands' three largest banks (ABN Amro, ING, and Rabobank) reported in August that they remained largely unaffected by any spillover from the U.S. subprime mortgage and international liquidity crisis. For ING, the bank's exposure to mortgage-backed securities was limited to $4.3 billion, or approximately 0.3 percent of the bank's total capital, according to ING spokespersons. Representatives from ABN Amro reported limited exposure to U.S. subprime markets, noting the bank's sale earlier this year of its American mortgage operations, the Chicago-based LaSalle Bank, to Bank of America. (See ref A for separate reporting on ABN Amro's takeover.) Rabobank reported in its second quarter report on August 29 that the bank had "no direct exposure to U.S. mortgage lenders." The report also noted that even any indirect exposure via special investment vehicles was moderate, given that more than 90 percent of the bank's lending was rated triple-A. ¶3. (SBU) Nonetheless, ABN Amro representatives have remarked to Econoffs that Dutch banks' exposure to the U.S. subprime mortgage market may not yet be fully known. Banks have also become wary of inter-bank loans, as their counterpart's risks have become harder to assess, according to an ING source. SOME MEDIUM-SIZED INSTITUTIONS SUFFER -------------- ¶4. (U) The Netherlands Investment Bank Capital (NIBC),a medium-sized investment bank, was the first Dutch financial institution to report effects from exposure to the U.S. subprime mortgage crisis. On August 9, the bank released its second quarter preliminary results, including a substantial drop in net profits. As a result, Standard and Poor lowered NIBC's rating. On August 15, NIBC published its final half-year report, including a loss of 137 million euros (about $200 million). That same day, the bank announced that it had been bought by the Icelandic Kaupthing Bank for 3 billion euros. Under the terms of the acquisition, a consortium of NIBC shareholders will retain the bank's U.S. subprime mortgage related portfolio and sell it prior to completing the take-over. ¶5. (SBU) During meetings with Econoffs, Dutch Finance Ministry officials noted surprise over the extent of NIBC's involvement in the U.S. subprime mortgage market. On November 16, NIBC published its third quarter results, including a 13 percent rise in after-tax profits to 204 million euros (about $299 million). ¶6. (U) The asset-backed security fund Hiax of the Amsterdam-based securities firm Faxtor Securities appears to be another "victim" of the U.S. subprime mortgage crisis. Hiax has been investing since 2006 in the U.S. mortgage market and also in subprime mortgages. Since this summer, the value of its investments has dropped causing its financial backers to demand payment for a 200 million euro loan, according to press interviews with Faxtor Director Reinier Klaasen. However, Klaasen has denied that Hiax is collapsing and has publicly said that Faxtor is still negotiating with its lenders. Hiax THE HAGUE 00002053 002.2 OF 003 investors are mostly wealthy individuals and investment managers, with total deposits estimated at 52 million euros. According to its website, the fund's total portfolio is valued at 285 million euros (about $471 million). EFFECT ON DUTCH ECONOMY LIMITED -------------- ¶7. (U) Coen Teulings, new Director of the Netherlands Bureau for Economic Policy Analysis (CPB),told the press earlier this fall that the current global credit crisis was serving as "a stress test" for the international financial system. CPB's 2008 Macroeconomic Study for the Netherlands included a scenario under which the current U.S. subprime mortgage crisis would affect the Dutch economy. According to CPB's calculations, the crisis could fuel higher interest rates, lower share prices, reduce oil and gas prices (the Netherlands is a major gas exporter),and decrease world trade. This could ultimately lower Dutch economic growth to 1.75 percent in 2008 instead of a projected 2.5 percent. Teulings cautioned, however, that such a scenario was unlikely and argued that "the effects of the mortgage crisis will be limited." He noted, for example, that the stock markets, including the NYSE-Euronext Amsterdam exchange, had already begun to recover. ¶8. (U) In his 2008 national budget calculations (reported ref B), Dutch Finance Minister Wouter Bos also warned of a potential budget deficit if economic growth in the Netherlands dropped below 2 percent. The draft budget warned that projected budget surpluses in coming years could become deficits because of exposure to the U.S. subprime mortgage crisis and a slowing of the U.S. economy. This reasoning is based on the fact that the Dutch economy remains heavily dependent on international investment and trade and the transshipment of goods, especially from the U.S. Meanwhile, the Dutch economy continued to grow at a rate of 4.1 percent in the third quarter of 2007, when compared with the same period in 2006. (NOTE: In 2006, the Netherlands was the eighth largest market for U.S. exports, valued at $31 billion. The U.S. is the largest investor in the Netherlands, with an accumulated total of $215 billion in 2006. The Netherlands ranks as the fourth largest direct investor in the U.S. economy, with an accumulated total of $189 billion in 2006. END NOTE.) NO DUTCH REPEAT OF CRISIS LIKELY -------------- ¶9. (U) In a recent reply to questions from the Dutch parliament, Minister Bos said the Dutch mortgage market was unlikely to experience problems similar to those within the U.S. mortgage market, given a lack of so-called subprime mortgages in the country. Individuals in the Netherlands who do not qualify for mortgages at regular rates, including freelancers, expatriates, temporary contract workers, and those who lack a good credit history, can apply for so-called non-confirming mortgages. Applications for non-conforming mortgages must meet stricter income earning requirements than applicants for normal market-rate mortgages. Applicants are also often required to make an advanced deposit. Non-confirming mortgages represent only 1-1.5 percent of the total Dutch mortgage market. In general, the Dutch opt for longer-term, fixed interest rate mortgages. BUT WORRIES REMAIN -------------- ¶10. (SBU) The Netherlands' largest banks, including ABN Amro, ING, and Rabobank, have more customers abroad than in the Netherlands. These banks are also operating in many new EU member states where capital requirements are less stringent. Some Finance Ministry officials worry that financial supervisors in these countries are "loosing control and say" over their local financial markets. These officials note the GONL has been discussing internally the implications of a situation in which one of the Netherlands' larger banks declared bankruptcy and whether the Dutch government and/or Central Bank would be liable for bailing it out and compensating foreign clients at the expense of Dutch tax payers. Such actions, they add, would be very difficult politically to justify to the Dutch public and parliament. ¶11. (U) Some organizations, including the Dutch Corporate Governance Monitoring Group and the Netherlands Authority for the THE HAGUE 00002053 003.2 OF 003 Financial Markets, have responded to the current financial turbulence by calling for a larger role for internal Supervisory Boards at Dutch financial institutions and firms. These groups argue that these bodies are best placed to monitor the financial health and investment decisions of firms and the need to step in when needed. Other financial experts have called for tighter regulation of the financial sector, including higher reserve requirements and increased deposit protection. They acknowledge such measures could impose additional costs to banks and other financial institutions, at least in the short run, but argue that any improvements in transparency and investor confidence would be positive. COMMENT: WAITING FOR FINAL 2007 RESULTS -------------- ¶12. (SBU) While any spillover from the U.S. financial crisis appears to have been limited in the Netherlands, the NIBC and HIAX fund cases have raised awareness of the potential damage from exposure to such crises. The current crisis has also drawn attention to the potential for failure of financial institutions with cross-border European operations and GONL and Central Bank liabilities in such cases. Meanwhile, it remains uncertain how the GONL will respond to this issue as well as increased pressure for closer oversight and regulation of the Dutch financial sector to prevent any future fallout. The financial sector's 2007 final/fourth quarter results (expected in February 2008) may be the first real indication of whether the Netherlands has managed to weather the current crisis. ARNALL