The Netherlands and the European Debt Crisis

Over the past 18 months, the interest rates for the government debt of Greece, Ireland, Portugal and Spain have risen to such levels that redeeming these debts has become problematic. This directly affects the Netherlands because it provided support to both Greece and Ireland via various channels.

Will the troubled countries be able to fully repay their debt? Policy institutions remain confident, but the premiums to insure the government debts of these countries show that the financial markets do not share this assessment. Certainly with respect to Greece, there is a risk that the country will not be able to fully repay its debt. If Greece’s level of debt is indeed too high to redeem, continuing to require full redemption will be detrimental to the Netherlands, as this would negatively affect its growth perspectives. This will decrease the amount of debt repaid. Reducing the debt will prevent this and will therefore benefit all parties.

Who will pay the bill of such a debt decrease: the original creditors or the governments of the Euro area (and thus ultimately their tax payers)? As soon as it is clear that a troubled country is unable to fulfill its obligations, a decision on this issue is required. The longer this decision is postponed, the higher the proportion of the original debt re-financed by the emergency fund will become. Consequently, the proportion paid by the creditors will be lower, and the portion of the bill eventually presented to the governments of the other Euro area countries will increase. It will prove difficult to charge the creditors, however, as these largely consist of banks, insurers and pension funds. It is unclear whether all European banks will be able to bear such a loss. Also, there is a fear that restructuring will lead to a European banking crisis. For this reason, the European banking sector must become healthy again and a mechanism enabling the restructuring of government debts must be established.

The Netherlands Bureau of Policy Analysis has published a brief of 14 pages on this issue. The pdf is available at:  http://www.cpb.nl/sites/default/files/publicaties/download/cpb-policy-brief-2011-03-netherlands-and-european-debt-crisis.pdf