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Monday, 30 January 2012

The Celtic Tiger: what Greece, Portugal and Spain could learn from the emergence and collapse of Ireland in the nineties and zeroes.

When you look at the unemployment rates of Greece and Spain, you feel a mix of desperation and anger. On the large unemployment among workers from 25+ years and the outrageous unemployment among youngsters in both countries. Although the unemployment rates of Portugal are much better, compared to Greece and Spain, there is still massive youth unemployment in Portugal. All data is courtesy of the Eurostat database (

Unemployment in Portugal from 2000-2011 per age category and gender
Data courtesy of: Eurostat (
Click to enlarge

Unemployment in Spain  from 2000-2011 per age category and gender
Data courtesy of: Eurostat (
Click to enlarge

Unemployment in Greece from 2000-2011 per age category and gender
Data courtesy of: Eurostat (
Click to enlarge
Perhaps it is true that all three countries have vast black economies and not all officially unemployed people are in reality unemployed. Both the tourism and the food and beverage industry (two important industries in these countries) are very vulnerable to black labor, as it is virtually impossible to check out all personnel during the holiday season. Still, these unemployment figures speak volumes of labor markets that are totally messed up.

But wait… There was another European country that suffered from massive unemployment in times not very long ago. On top of that, it was an extremely poor and slightly backward country that suffered from foreign domination for a long time, only to liberate itself through a bloody war of independence.

In the nineties, this country went through a kind of make-over and changed into one of the most successful and rich countries in Europe, only to plunge downwards again in 2008. The downfall happened, because of a massive real estate bubble and a privately-held debt that was mindboggling. This country was Ireland, aka the Celtic Tiger and one of the genuine members of the PIIGS.

Maybe there can be lessons learned for the three PIIGS-countries having the hardest time, currently: Portugal, Greece and Spain. Maybe these countries could use the things that Ireland did right in their own economies and avoid what Ireland did wrong.

Let´s dive into the emergence and collapse of ´The Celtic Tiger´. The history of the Celtic Tiger is based on a Wikipedia-analysis ( Here are a view snippets from this article, combined with my comments:

The colloquial term Celtic Tiger has been used to refer to the country itself, and to the years associated with the boom. During that time, Ireland experienced a boom in which it was transformed from one of Europe's poorer countries into one of its wealthiest. The causes of Ireland's growth are the subject of some debate, but credit has been primarily given to state-driven economic development: social partnership between employers, government and unions, increased participation in the labour force of women, decades of investment in domestic higher education; targeting of foreign direct investment; a low corporation tax rate; an English-speaking workforce, and crucial EU membership – which provided transfer payments and export access to the Single Market.

Scorecard in which the Irish Key Success Factors are investigated for
Portugal, Greece and Spain. Data based on various sources
Click to enlarge

In this scorecard, I took the scores of these PIIGS-countries on the earlier mentioned Key Success Factors for Ireland. These scores are based on data from various sources that I could find via the internet.

Portugal scores best with three Good/Moderate scores and a reasonably attractive corporate tax rate of 25%. However, the country scores quite poorly on targeting foreign direct investment, according to the Ernst & Young European Attractiveness Survey 2011, as it doesn’t belong to the top 15 of most popular countries for foreign investments.

Spain scores only moderate in most categories, but is a quite popular country for foreign investments (#5). The relatively high corporate tax and the poor knowledge of English are points that need improvement.

Greece scores generally poor in most categories, but has a low corporate tax and a workforce with moderate knowledge of English. There is ample room for improvement in this country.

None of the three countries is outstanding in any category. While Portugal has the best cards currently, all three countries could improve here to make themselves more attractive to foreign investors. Especially a good knowledge of English, substantial investments in higher education and attractive corporate tax rates could do a lot for these countries.

In the 1990s, the provision of subsidies and investment capital by Irish state organisations  encouraged high-profile companies like Dell, Intel, and Microsoft to locate in Ireland. These companies were attracted to Ireland because of its European Union membership, relatively low wages, government grants and low tax rates. Enterprise Ireland, a state agency, provides financial, technical and social support to start-up businesses.
The building of the International Financial Services Centre in Dublin led to the creation of 14,000 high-value jobs in the accounting, legal and financial management sectors.

In these trying times, there could be chances for Portugal, Spain and Greece when they can lower their wages and lower their corporate tax rates. All three countries are of course already a member of the Euro-zone.

I would make one difference to the Irish approach. Instead of attracting high-profile companies with investment and development subsidies, I would attract those companies with longterm (at least ten years) corporate tax breaks, effectively lowering the tax rates to 15-20%.

Subsidies cost a lot of money from central and local governments and when these subsidies eventually dry out, companies have less reason to stay in their host country or region.It happens quite often that companies directly start to look for other subsidized locations instead. Tax breaks on labor and corporate tax on the other hand, initially cost less money to the governments when handed out and can therefore be handed out for a long period (> 10 years). Through job creation and increased prosperity among the population, these tax breaks will pay themselves back eventually.

Irish workers can communicate effectively with Americans — especially compared to other low-wage EU nations such as Portugal and Spain. This factor was vital to U.S. companies choosing Ireland for their European headquarters.

  My Ernst´s Economy´s Top Tip for Spain, Greece and Portugal: teach all unemployed youngsters and students English and make sure they become good at it. Give also older and employed workers a chance to study English. It will be worth every penny of investment. English is the ´Lingua Franca´ of the 21st century, whether you like it or not. When these countries produce workers that speak English fluently, it will dramatically increase their chances on foreign investments.

By mid-2007 in the wake of the growing global financial crisis the Tiger had all but died. Some critics, such as David McWilliams who had been warning about impending collapse for some time concluded that: `The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it`.

In February 2010, a report by Davy Research concluded that Ireland had "largely wasted” its years of high income during the boom, with private enterprise investing its wealth "in the wrong places", comparing Ireland's growth to other small Euro zone countries such as Finland and Belgium - noting that the physical wealth of those countries exceeds that of Ireland, because of their "vastly superior" transport infrastructure, telecommunications network and public services.

If these three PIIGS-countries succeed in attracting foreign investments and their GDP will rise eventually, they better not invest their money in ´bricks and mortar´. Instead they should invest the money in:
  • Even better education; 
  • A high-tech ICT infrastructure all over the country; 
  • Good roads, ports and waterways; 
  • Centers of excellence in the areas of agriculture, high-tech, manufacturing and services, where scientists and universities, companies and the local government are working together to create value for the future. A good example of this in The Netherlands is Brainport Eindhoven.

All these three countries experienced a kind of real estate bubble during the last fifteen years. Especially the CRE- and RRE-bubble in Spain was really huge. I hope all these countries have learned their lesson from this and avoid real estate bubbles in the future.


The Irish approach certainly offers perspective for the three most challenged PIIGS countries: Portugal, Greece and Spain. All three countries have ample room for improvement where it concerns the key success factors of Ireland.

The unfortunate circumstance is that the EU, the European Central Bank (ECB) and the International Monetary Fund currently focus too much on austerity measures to achieve a reduction of state debt and state deficits. 

Austerity measures in the current circumstances will further choke the economies of these PIIGS, but can´t be avoided unfortunately. The leaders from Germany, The Netherlands, France and other Euro-zone core countries are currently looking at the PIIGS´issues ´with blinders on´, focusing solely on the financial and not on the economic issues of these countries.  Therefore they miss the reasons that these countries are lagging so much, compared to the countries in the Euro-zone core.

But this too shall pass and in a few years Greece, Spain and Portugal might have more leeway to make their own economic decisions. I wouldn´t be surprised if these countries would follow the Irish example.

And then the most important lessons from Ireland´s collapse in the years after 2000 are:
  • Invest in all kinds of infrastructure, but not in real estate
  • Avoid an elevated inflation and thus a price-wage spiral.
  • Keep the banks (national as well as international) on a short leash and make sure they don´t hand out ´kamikaze´ loans to companies and citizens in your country.
  • Keep innovation and investments in higher education and high-tech flowing. Your country should have a competitive edge at the unavoidable moment that the wages go up.

Friday, 27 January 2012

Increasing numbers of higher educated people are eating into their nest eggs or savings.

While in the US the optimism on the economic situation is growing among investors, The Netherlands is having a brisk walk on the bear-path, still deeper and deeper into the dark forest.

Today, the Dutch radio station Business News Radio ( published an article that Dutch people are currently eating into their savings. These are not only the lower paid and educated people, which you might expect. To the contrary, also the higher educated people that earn a more than decent salary are very much represented among this group. Why is that? Here are the pertinent snips from the BNR-article:

According to the intermediate Dutch bank ‘Friesland Bank’(, 25% of the Dutch citizens used their nest egg or savings to make ends meet in 2011. What is striking in this result, is the fact that 33% of the investigated group has a bachelor or masters degree in education and an income of €40,000 per year or even higher .

Today Klaas Feenstra, Director Sales of Friesland Bank, stated to BNR that highly educated people use their nest eggs to ‘keep up appearances’ and maintain their lifestyle, to book a (second) holiday or to purchase a car.

The fact that the interest on savings’ acounts is extremely low, is not per definition the reason that the Dutch use their savings: until July 2011, there has been a constant rise of the total savings at Friesland Bank.

Afterwards the savings’ money has been used extensively. According to Feenstra, it is very well possible that people use their savings for amortization of mortgage loans, urged by messages in the media.

Next to this published interview with Klaas Feenstra of Friesland Bank, BNR held a radio interview with Jet Creemers, chairwoman of the Dutch Association of Collection Agencies (NVI). I will show here a translated summary of this radio interview (no link):

Jet Creemers, chairwoman of the NVI  states that Dutch people with higher incomes suffer extra from budget problems, compared to people with more moderate incomes. These people feel the need to maintain their p;d lifestyle and are currently using their savings for investments.

Creemers: ‘many higher educated people had more financial obligations than they could bear. They accepted these obligations, expecting that their incomes would remain rising over the years, These people are now confronted with the consequences of this behavior, as they can’t pay their financial obligations from their disposable income anymore. They are now eating into their savings and nest eggs.

There are a few problems: the yields on invested money dropped, as the duration of the crisis was much longer than expected. This brought the higher incomes into trouble. The interest on savings’ accounts was very low, but the yields on stocks and bonds were also very low.

And at the Dutch housing market, there are a lot of unsold houses. These houses cause double housing expenditures, as the owner has to pay for the old and the new house as well. On top of that, the value of the houses did also drop during the last 5 years; sometimes well beneath the mortgage amount. This leaves people no excess value on their house as a base for new loans. And now the bonuses and extra payments, that people received earlier, have diminished too.

People reckoned with a higher income coming over the years when they stepped into their financial obligations. Now this higher income doesn’t come at all, the situation is getting more and more difficult for these high earners.

While the government is aimed at helping people when the financial damage is already done, it doesn’t act proactively to prevent people from coming into financial trouble. It would be much better when the (local) government would offer help to people that lost their job. Help on how to cope with a lower income, how to keep your budget lean and mean and how to not live beyond your means.

This doesn’t happen yet, unfortunately’

The hardest thing for people during crisis years is saying goodbye to the life that has been, when they can’t afford it anymore and getting used to a new, more austere life.

This is a true process of mourning and letting go of some or all the good things and luxury that these people were used to. Yet it has to happen. Not only for the people that lose their job or get paid much less for it, but also and especially for their wives, husbands and children that were also used to luxury.

Telling your teenage daughter that she cannot ride on horseback anymore is something that no mother or father wants to do. Or telling your son that he has to abolish his sports club.

The greater the difference between the old and the new life is, the ‘easier’ this process might be. If you go from €4000 per month to €2000 per month, you know that you have to radically change your spending pattern.

But if you go from €4000 per month to €3500 per month, you might still spend €4000 per month, as the difference is so small that you don’t notice it directly. These are the situations where people eventually start using their savings’ accounts.

In 2007, The Netherlands and the United States had in common that both countries had a huge housing bubble. Although the Dutch have a much better track record on paying their mortgage redemption and interest, the Dutch housing bubble was hardly smaller than the American one.

The greatest difference, however, between The Netherlands and the US was the pace of debt destruction in the housing market. Since 2007, the US housing market has lost at a brutal pace between 30% and 60% in average value. Of course the housing prices dropped much less in New York than in Florida, but in general the process of debt destruction happened very quickly overthere.

The Dutch housing market has only lost 10%-20% in value since 2007. The government, and special interest clubs like the houseowners association ‘Vereniging Eigen Huis’ (VEH) and the realtors association NVM, tried very hard to regain the pre-2007 status quo, but this had little success. What it did achieve, however, was the extremely slow pace of debt destruction. The bubble deflates with a sizzle and not with a bang.

And then there is also the issue of residual debt for people that want to sell their house while being under water. In reality they can´t do so, as they get stuck with an enormous residual debt that costs years and years to return. The only escape route is defaulting, but this is a long and painful process of at least five years before you can make a fresh start. This obstructs a nasty, but quick process of debt destruction at the Dutch housing market.

This is a negative factor, as the slow debt destruction will probably lengthen the crisis for years and years in The Netherlands. This might be very bad news for the higher earners. Their nest eggs and savings’ accounts might be gone well before the crisis is over!

Thursday, 26 January 2012

Letter to the Dutch houseowners association "Vereniging Eigen Huis" (VEH )

Yesterday, I got in touch with a representative of the Dutch houseowners association Vereniging Eigen Huis (VEH), Cindy van Noordenburg, via Twitter.

I had written some tweets about this association, in which I rejected its view on the Dutch Mortgage Interest Deduction and the fact that it wants to urge the Dutch banks to resume lending more mortgage money to potential houseowners.

In my opinion, the view of the VEH reflects irresponsible behavior in regard to the Dutch housing bubble and regarding the fact that many Dutch houseowners are already heavily under water. The VEH rather wants to reinflate the bubble than to deflate it.

Cindy sent me a link in which the official stand of the VEH is printed. I will print the most important snips of this stand to be open about it. Of course you can find the whole view of VEH behind the link:

What does VEH think of the Mortgage Interest Deduction (MID)? Interfering in it or not?! Households want their house to remain affordable and don’t want it to lose value, due to a tax measure. The association therefore takes a clear stand on the MID.

The MID is under discussion. The government needs to take austerity measures and the expenses of the MID could become unaffordable in the future. Besides that, the MID could lead to an excess national mortgage debt. Expenses and debt form a threat to the financial stability of our country, so it’s told. That is why some political parties and leading figures from the financial industry plead for abolishing the mortgage interest deduction .

Don’t touch it now, but it's not a taboo for the future!

In the current market situation, a separate interference in the MID is not an option for the association. This will lead to higher housing expenses for the roughly 3.8 mln households with a mortgage. More households will get into trouble. A limited MID will definitely lead to a further decrease in value of all houses. Built-up financial capacity will evaporate and losses on sales will increase. This has serious consequences for the economy and also for employment.

Besides that, a separate interference is a would-be cutback. The result of a deduction-reduction is neutralized by lower tax-yields and higher payments for social securities.

A few direct comments to this view of the VEH, which I translated as exactly as I can:

Expenses and debt form a threat to the financial stability of our country, so it’s told.

This sentence tries to turn facts into ‘just an opinion’ with the last three words. This ‘opinion’ is expressed by the IMF and dozens of economists and financial experts from all over the world. I consider this more than an opinion. One example: if the housing portfolio of the large four banks in The Netherlands would be valued marked-to-market, I am convinced that all four banks would have negative equity. This of course is also an ‘opinion’. 

A limited MID will definitely lead to a further decrease in value of all houses.

The funny thing of the current situation is that the value of houses decreases anyway, with or without the MID.

The VEH asked today to explain the tone-of-voice of my tweets. Therefore I wrote the following letter to Cindy van Noordenburg of the VEH (of course in Dutch).

Dear Cindy,

My opion on the Mortgage Interest Deduction has been unchanged for a number of years:

·         The MID led to an enormous availability of too cheap money (especially with the low interest rates of the last 15 years), as people can borrow almost twice as much money as without the MID. The risk-awareness of the banks as well as the buyers was gone. In my opinion (as I’m not a member of the association), the VEH remained too silent in the media about the consequences of this excess money in the housing market.

·         By requesting the banks to soften the borrowing rules for customers again, you help people getting further indebted than they actually should be. Also you encourage banks to take again more risk. Even the IMF (not exactly a club of misinformed people) talks about the excess mortgage debt of the Dutch citizens.

In addition, the loan-to-value (LTV) ratio of new mortgages has continued to rise from its already unusually elevated levels, and exceeded 120 percent in 2010 according to some measures. Liberal mortgage interest tax deductibility (MID) has inflated mortgage size, and also led to the proliferation of interest-only non-amortizing mortgages since the mid-1990s.

10. Action to mitigate housing market vulnerabilities and distortions is needed, including a gradual reduction in MID. Given heavy exposure of the financial system to the housing market, a determined response to the buildup of vulnerabilities is warranted.]

·         Since 1995 houses – all house types – almost tripled in value, due to extremely low interest rates and the MID. This was measured through data of the Central Bureau of Statistics.

·         You called the increased housing value built-up financial capacity for people that bought a house before 1995, I call this built-up debt for everybody that bought a house after 1995 and became a victim of this bubble.

·         The higher housing prices only enable higher community and government taxes (real estate tax and income tax) and can only be cashed when you buy a rental house or leave The Netherlands. In all other cases you have to buy an overvalued house yourself. This makes the conception ‘built-up financial capacity’ very relative.

·         Due to the price decreases that occured at the housing market (this process started well before the beginning of the credit crisis), many people can’t pay back their mortgage anymore. Returning to the old, soft mortgage standards will not turn around the process of price decreases. When you think it will, I think you are naïve.

·         By holding on to the MID, you try to maintain the created housing bubble. Instead you could plead for an abolishment of MID (reduction in phases in  5-10 years), in combination with subsidized redemption that is paid from the same €12 bln that the MID currently consumes. I don’t hear you about such a solution.

·         This would make the prices of houses decrease to a level that is more affordable for starters on the housing market, without forcing them to be heavily indebted. This should be also in your interest; or do you only represent the settled houseowners?

·         Besides that, if the MID is totally abolished within 5-10 years, this could lead to a general tax reduction, as the MID should not have to be financed anymore. This reduces wage costs for Dutch companies and makes the Dutch economy more competitive.

·         Our debt position in the world would be much better when the Dutch mortgage debt is reduced and houses are less overvalued. This forced debt destruction already took place in the US. This country seems to have found the path to growth again. The Netherlands is still falling into a deeper recession.

·         You can hardly deny that the number of people in arrears on mortgage debt is getting more and more serious. These people get less and less money for their home through OTC (over the counter) sales or foreclosure, presuming that the bank even dares to foreclose on the house. The housing market is already done with high prices since 2006 and is stagnating ever since: well before the start of the credit crisis.

I understand that your association tries to defend the interests of houseowners, but these interests are better served when people pay back on their mortgage debt (with the help of a temporary government subsidy that replaces the MID) to the level of the true value of their house. And this true value is at least 20-30% below the current price level.

When price and debt destruction do their job, there will be room in The Netherlands for a healthy and realistically priced housing market. But The Netherlands now has to bite the bullet and abolish the MID.

As you see, my opinion is neither based on howling with the ‘media wolves’, nor is it a personal aversion against the VEH. These findings are based on my own investigations. Investigations of which the conclusions are very clear to me, but unfortunately to a lesser degree to you.

I don’t have the illusion that I can convince the Vereniging Eigen Huis with the previous letter; therefore their stand has been too rigid over the years. But maybe I can make the association think a little on the justifiability of their past and present policy. 

Tuesday, 24 January 2012

KPN shows disappointing figures for 2011Q4 and 2011Y. Dutch telecom behemoth struggles with its earnings model in the smart-phone market and with diminished results in fixed telecom and the corporate market.

Today, the Dutch Telecom giant KPN presented its Q4 and annual figures for 2011. As already could be expected from the earlier profit warnings last year, the figures were clearly disappointing. Nevertheless, the company still makes a healthy profit of more than €1.7 bln (before taxes) in 2011.

First, I show the pertinent snips of the official KPN press release, combined with the most important annual results. Afterwards I print a translation of an interview of the Dutch financial newspaper Het Financieele Dagblad ( with chairman Eelco Blok of KPN

Annual results KPN (Press release English) (Direct link to the PDF-file)

·         Financial results in line with full-year outlook
·         The Netherlands overall performance not meeting our expectations
·         Positive trends in IPTV [internet television – EL] and Fibre to the Home [internet, telephone and television services through glass fibre- EL]
·         Continued strong performances in Germany and Belgium
·         Outlook 2012 lower, reflecting transition year

Message from the CEO, Eelco Blok
"In 2011, we have achieved our Group outlook. We have seen positive trends in IPTV and FttH [Fibre to the Home – EL] and our international businesses continued showing strong underlying profitable growth. However, some aspects in the performance of The Netherlands did not meet our expectations.

In order to strengthen our domestic businesses in response to the challenges they face from the changing external environment, we will further expand and accelerate our investment strategy beyond the measures we announced in May 2011. This means 2012 will be a year of transition in The Netherlands, as we aim to bottom-out our broadband market share and to stabilize our market share in Consumer wireless.

The investment strategy will ensure a sustainable level of profit for The Netherlands going forward, combined with a focus on quality and simplification to drive customer satisfaction and reputation. In 2012 we will continue to balance revenue growth and EBITDA margins of our international businesses and keep investing in mobile network roll-out in Germany and Belgium. Group profits and cash flow will be lower in 2012 while The Netherlands is in transition, which is reflected in the 2012 Group outlook.

Furthermore, the overall macro environment is unsettled. At such a time, we must strike the right balance between investments, including possible strategic investments (e.g. spectrum and fiber), shareholder remuneration and a prudent financing policy. I have full confidence that KPN will come out of this transition year a stronger company."

Here are the most important data taken from the annual results in figures (link points to file in XLS-format):


Consolidated revenue overview
All data courtesy of KPN (
Click to enlarge
Although Belgium and Germany showed some improvement in Q4, the overall revenues over the year 2011 are in two words: mostly disappointing. The international mobile phone business showed disappointing results with lower sales in Germany and Belgium. 

The fact that International Mobile in the end still shows increased revenue, is probably due to eliminations in the rest of the world. These eliminations improve the overall negative picture, but are probably one-off. The core business did disappoint, however.

The consumer market decreased by 5%, probably due to diminished fixed phone usage (cheap per minute of calling, but expensive for fixed costs) and the usage of free apps on the smart-phone. The decreasing results on business and wholesale show that companies are also busy diminishing the costs of phone usage one way or another.

I’ve written a number of articles on the changing business model in the Telecom market. This article explains largely the disappoint revenues that KPN reports today.

In my opinion fixed internet and mobile internet will become normal utilities in the near future, just like electricity is a normal utility. You don’t think about it, you don’t compare it often with the offers of other providers (maybe only once a year when the contract expires)… It just needs to be there, when you plug it in; at the highest quality and against the lowest possible price.

Currently, there are lots of tricks and stunts that telecom providers pull to keep customers under contract, while paying lots of money:
·         exclusive phone contracts (Apple(!)) with high subscription and usage fees;
·         cheap or free smartphones (non-Apple) with high subscription and usage fees;
·         opaque contracts and subscription forms that are impossible to comprehend for normal citizens;
·         contract-limits for data usage;
·         very expensive data usage beyond the contract-limits;
·         pinched-off access to free apps that substitute dearly paid telecom services;

I think this business model will disappear to be replaced with a business model that treats fixed and mobile internet as a utility. The customer buys a phone and pays a very limited fee per month for internet bandwidth. All ´classic´ telephone actions (calling, SMS-ing) will go via IP connections, as there is no need anymore to use the classic digital voice or data connections.

Now, there are still big differences in quality between the individual telecom providers (especially where it concerns countrywide coverage). I think these differences will disappear soon as all providers are reaching the maximum coverage and maximum possible speeds in ADSL (twisted copper), cable (coax copper), glass-fiber and wireless connections.

Profits and Losses
Consolidated P&L
All data courtesy of KPN (
Click to enlarge
You could say that in 2011 KPN lost almost €600 mln in profit before taxes, when compared to 2010 and then you are right.

But you can also say that KPN still earned €1.7 bln before taxes in 2011 and then you are also right. In my opinion, this table shows that the telecom business is still extremely lucrative for KPN, with a net margin of 11.7% in 2011. Compared to last year’s net margin of 13.4%, however, there is a considerable loss of 1.7% in margin.

Balance sheet

Consolidated balance sheet
All data courtesy of KPN (
Click to enlarge
There are two remarks that I want to make on this balance sheet:
·         In my opinion, KPN is extremely leveraged for a non-bank company: 7.64 times
·         More than one-third of the assets exists of goodwill, licenses and software. I can understand that these kinds of intangible assets are common at a telecom company, but I think that the combination of little tangible assets with the highly leveraged equity is quite dangerous, when you look at corporate risk.

The Dutch financial newspaper Het Financieele Dagblad printed today an interview with CEO Eelco Blok, who had a very tough rookie year as CEO in 2011. Here are some snippets of this interview:

This Tuesday, 24 January 2012, the CEO of KPN Eelco Blok came with a tough message for its shareholders. The profit and cashflow will diminish strongly in 2012 and the company will not buy back its own stock anymore.

`The free cashflow will possibly diminish with 30% in 2012. How is that possible? Last year (2011), we had a one-off benefit of €250 mln, which we won’t have in 2012. On top of that there are additional investments, for mobile telephony in Germany and glass-fiber in The Netherlands. Due to pressure on prices, the profitability of the business market is simply diminishing. And then there is the mobile market where we are losing market-share. We expect that the market will bottom-out this year.´

´And how do we explain to our shareholders that we stopped with our buy-back program for shares? Our shareholders saw the €1 bln buy-back program as a privilege. But we decided to invest in our company. You can only spend a euro once. I wish it would be different. And we are here to serve all our stakeholders´

Looking at the increased leverage of KPN in 2011 and the increased risk that is the result of it, I think that Eelco Blok´s decision to stop with buying back shares, is a wise one. A utility company like KPN should not gamble with leveraged money.

Monday, 23 January 2012

Two reasons why the Dutch housing and mortgage market is critically ill.

In this article I will give you two important reasons why the Dutch mortgage and housing market is really critically ill.

Reason One: The banks don’t lend mortgage money… at all. They don’t have it anymore.

Today, an Op-Ed was printed in the Dutch newspaper Trouw ( The author Rob Schouten, an independent mortgage-intermediary, complained on the circumstance that ABN AMRO, the third bank in The Netherlands, and almost all other banks, didn’t want to issue mortgage to financially stable customers… at all.

Here are the pertinent snips of the Op-Ed, in this case coming from the weblog of this independent intermediary:

The issuance of mortgages has stalled and banks almost stopped with handing out new mortgage loans. Of course the bad housing market in The Netherlands is an issue, but it is especially the reluctance of banks to hand out mortgages, that kept the issuance at a bare minimum.

I am annoyed by the stories that banks tell about their situation. These stories are not honest and fair.

Due to government measures, banks have less money or even no money at all to issue mortgage loans, as the banks have to deal with new and stricter capital demands. I understand that. 

But why do the banks act in the meantime, towards customers applying for a loan, like everything is hunky-dory while it isn’t? Also to the outside world banks deny that they issue less mortgage loans or even won’t issue mortgage loans at all. ‘Oh no, we currently issue mortgages, just like we did before’ or ‘We like to help entrepreneurs with their financing issues’.

I have noticed for a considerable time now that banks in reality do everything in order to not having to issue mortgage loans. Already more than one year ago, an account manager of ABN Amro visited me with the following, urgent request: ’Dear Rob, please don’t apply for mortgage loans at our bank anymore; we simply don’t have money for it’. The account manager himself also considered it a strange request. 

The same bank rejected a request for a mortgage with a National Mortage Guarantee (NHG), after the first approver already had confirmed the loan. The collateral was OK, the salary and the taxation; everything was fine. The reason for the bank to reject the loan application? The applicant had overdrawn his current account a few times!

The long-term, safe standards for an NHG were suddenly totally ignored. No bank follows the standards for debt-to-income anymore. Customers are rejected. When I enter into a contract with a customer, I hear more and more often the following question: ´How did the customer get his savings´ money?´ A mortgage application with a small correction on the employer´s statement (an error in the postal code) led to a rejection, due to ´fraudulent changes´. A warning code for even the smallest arrears during the last five years at the Bureau of Credit Registration (BKR), leads irrevocably to a rejection. There is no exception possible at all.

Years and years of excess mortgages in The Netherlands led to a situation in which the Dutch customers are broke and the banks are broke too. I do sympathize with Rob Schouten, the mortgage intermediary in this Op-Ed. However, he is still a victim of the erroneous reasoning that everything was fine on the Dutch mortgage market, until the banks decided to tighten the terms for handing out mortgages.

Everything wasn´t fine in 2006! And it was time that this enduring mortgage madness ended. Now we finally seem to arrive in a situation where all Dutch stakeholders (except for the government yet) do agree on the fact that the Mortgage Interest Deduction (MID), in combination with the extremely low interest rates, has hugely disturbed the Dutch housing market. And that also agree that the Dutch mortgage debt of 120% of GDP is a ticking timebomb in The Netherlands.

The only medicine that helps now is debt destruction. As far as this concerns, The Netherlands is finally on its way now, but there is still a very long way to go.

Reason Two: Even if the customer is in arrears ‘forever’ the banks won’t foreclose anymore.

If you would tend to underestimate the seriousness of the current mortgage market situation in The Netherlands, please read then the pertinent snips of the following press release by ratings agency Fitch (

Fitch Ratings says that the low level of completed foreclosures in prime Dutch RMBS transactions is adding to the pressure on collateral performance. The comment follows the agency's review of 51 prime Dutch RMBS transactions, which resulted in 173 tranches being affirmed, 2 being upgraded and 22 being downgraded.

Dutch RMBS loans' performance has softened over recent quarters. This is mainly evidenced by an increase in the proportion of loans in arrears, particularly late-stage arrears. While Dutch RMBS transactions have historically reported extremely low arrears, an increasing proportion of transactions are now reporting three month plus arrears in excess of 1%.

"Increased arrears are only partly a result of deterioration in the fundamental credit quality of Dutch residential mortgages," says Ibrahim Kamara, Analyst in Fitch's European RMBS team. "They also reflect a reluctance of servicers to sell properties at auction in current stagnant market conditions. Certain transactions have not reported a single completed foreclosure for quarters at a time."

The Dutch mortgage market is characterised by high loan-to-value ratios. Consequently, the majority of loans in arrears are also in negative equity. Reported loss severities are typically higher on loans that have been foreclosed upon through a court auction process. However, the low level of activity in the residential market means that consensual sales have become more difficult to complete. These factors combine to not only reduce the incentive for servicers to complete foreclosures through forced sales, but also to reduce the volume of consensual sales.
"It is important to note that absolute arrears levels remain relatively low despite the recent increases, particularly when compared to other European jurisdictions," says Gavin Crawford, Associate Director in Fitch's European RMBS team. "However, the increase in late-stage arrears, which Fitch expects to persist in 2012, is causing a build-up in potential foreclosure stock."

Dutch RMBS transactions do not explicitly define what constitutes a loan default. Consequently, provisioning mechanisms are only activated upon realisation of a loss, meaning that no provisions are currently being made for the loans in late-stage arrears.

The normal situation is that when a person or family is too long in arrears, the mortgage is foreclosed upon. But not in The Netherlands. The banks rather kick the can down the road for the people in arrears, while waiting in vain for the housing prices to rise again, than to take a loss on the mortgage. Fitch is right when it says that the auction prices are extremely bad, while on the other hand the chances on a consensual sales are very, very slim indeed.

This makes the banks desperate: theirs is the choice between booking a certain loss after a foreclosure and waiting in vain until the customer in arrears solves his problem or sells the house at a reasonable price. Banks in majority choose the latter, unfortunately.

In my opinion this happens, because the banks don´t want to write off on their Residential Real Estate portfolio. As long as there are no market prices set for houses, the historical prices in their books are alright. But as soon as a house is sold at an auction, there is a market price. This market price does not only deliver a direct loss to the banks, but it also questions the value of the other collateral in their mortgage portfolio, being in arrears.

And one thing is certain in my opinion: when the four largest Dutch banks must seriously write-off on their mortgage portfolios and their housing portfolio, used as collateral, no bank will have positive equity anymore.

And that makes the Dutch housing and mortgage market critically ill!

Saturday, 21 January 2012

The Dutch Pension Funds that have been battling low interest rates, as well as low yields on investments, throw the towel and reduce their pension payments

Due to the extremely low Euribor interest rate and the enduring blows at both the stock and fixed income market, many pension funds in The Netherlands are in trouble with their coverage ratio.

Where a ratio of 105% (i.e. having 5% more money in investments than is needed for fulfilling future obligations) is the legal minimum for a healthy pension fund, a substantial number of Dutch pension funds is below this amount. Far below…

Pressed by De Nederlandsche Bank (DNB; Dutch National Bank) these funds are considering the measures that are necessary to restore their coverage ratio. Although most pension funds are very reluctant to do so, a number of pension funds already had to decide to cut down the pension amount for the current and coming retirees, although the exact amount is still uncertain.

Het Financieel Dagblad (FD; writes on the largest pension fund ABP being forced to reduce its pension payments:

Pension fund ABP, the pension fund for civil servants and the largest in The Netherlands, announces a reduction of 0.5% on the pension amounts and raises the fee.The definitive decision on the reduction is taken by the board of directors on February 1. The temporary recovery raise on the pension fee, however, is anyhow increased to 3% from 1% .

This is stated by the civil servants’ pension fund in a press release. The new chairman Henk Brouwer can imagine that this is a disappointing development for participants in the fund.

ABP had a coverage ratio of 94% at the end of last year. Without the DNB interfering, that would have been 91%. The coverage ratio is the ratio between the invested capital and the financial obligations of a fund. DNB stroke a three month average of the calculation interest that is used to calculate the coverage ratio, instead of using the interest rate that was valid at the time. This action pushed the coverage ratios up.

With a current coverage ratio of 94% and when taking the pension fee raise into consideration, ABP is 0.5% short of reaching the demanded coverage ratio of 105% at the end of 2013. Brouwer: ‘unfortunately, we are obliged to take additional measures with this coverage’. He emphasizes that only at the end of 2012 it will become clear whether the pensions should be reduced or not.

The current coverage ratio of the ABP is only 94%, AFTER the DNB ´pimped´(i.e. artificially increased) the calculation interest and thus the coverage ratio by mediating the interest over a three month period, instead of using the actual interest (see the red text). Otherwise, it would have been a very poor 91%. That is bad.

But things are even worse at other pension funds. Again the FD:

Metal Industry Pension Fund ´PME´ announces a reduction of the pensions by 6%. The coverage ratio of the fund was 90% at the end of last year, which is below the critical threshold of 96%.

This is stated by a spokesman from PME. It is still under discussion, whether the pension fee is raised or the pension arrangement is retrenched.

Without DNB interfering, the coverage ratio would have been 87%. PME achieved a yield of 9.4% in 2011. This was not enough to get PME out of the problem zone. Chairman Frans-Willem Briët of PME: ´As a consequence of the low calculation rate, the pension obligations soared by 20% in one year. Besides that, the fund needed an additional coverage of 7%, due to the increased life expectancy.´ Based on the preliminary data, PME is short 6% of coverage.

The third pension fund in danger of lowering the pension payments is PMT, the Pension fund for Metal and Technical industry. Again the FD:

At PMT the intended reduction of the pension is between 6% and 7%. The coverage ratio at the end of December is 88.5% [percentage after DNB increased calculation interest - EL], while the critical threshold is 95%. 

Another pension funds got off with a fright. From the same FD article:

The Pension Fund for Healthcare and Personal Care got off with a fright, thanks to the DNB. The coverage ratio of the fund at the end of December was 97%. That would have been 93% without the DNB having interfered. In that case the fund should have reduced the pension payments by 1% and raised the fees by 2.5%

It´s a mess. The pension funds are in the center of a perfect storm:
·       The people get older and older, thus needing more pension payments;
·       The Euribor interest rate is about as low as ever;
·       The yields on the stock market and at the fixed income markets are poor at the moment;
·       The high-yield sovereigns (PIIGS) offer much too much risk, while the low-risk sovereigns (Germany, The Netherlands) don´t yield money at all;
·       In the meantime, the pension funds are facing a haircut on Greek debt of no less than 68%.

It is almost a miracle that the pension funds still managed to achieve decent returns, like 6%-9.5% return on investment in 2011.

So people could say: ´What is the fuzz about, if the DNB artificially raised the interest rates a tiny bit. The interest rate is indeed historically low at the moment and it will definitely rise in the future´. Then I would say to them: ´Ask the Japanese please, if this is such a definite thing to happen´. Please look at the chart:

Chart courtesy of
Click to enlarge
The Japanese interest rate has been (close to) zero since 1996 and will probably be close in years to come. At the same time, the Japanese Nikkei Index is still at only one-third of its peak performance, after almost 25 years wherein it never has been even close to its record. And Europe and the US have been following the Japanese scenario ´to a tee´ since 2008.

So it is my opinion that the DNB has gambled with the pensions of the youngsters, in order to sponsor the current pensionates.

These are the same pensionates that have mostly been retiring at the age of 55-62 years, while current youngsters are now facing a retirement age of 67-70 years. These youngsters will definitely live longer, in general, but not for the 8-15 years difference that will lie between their retirement age and the retirement age of the current retirees. 

It is not that I don´t grant the current and coming pensionates a good, steady pension, but it must remain fair towards the current youngsters.

And the worst thing that could happen to the youngsters, is that at the moment when it is finally time for these youngsters to retire, the current retirees will have emptied the piggy banks of the pension funds, leaving only this letter: ´Kindest regards, your parents … and the DNB´.