Dutch credit-crisis committee points finger at everyone

The Dutch parliamentary committee that investigated the causes of the credit crisis published its findings on Monday, arguing for stricter oversight of the banking sector.

By Egbert Kalse and Daan van Lent

All share in the blame and everybody should learn from their mistakes, was the conclusion of a special Dutch parliamentary committee after it finished its inquiry into the origins of the credit crisis. The committee, composed of Dutch parliamentarians of all stripes and chaired by socialist Jan de Wit, found no single party or person could be held accountable for the financial disaster. Instead, according to the committee, a collective blindness had taken hold and responsibility was shared widely. Based on these findings, it is unlikely heads will roll in the Netherlands.

The inquiry could yet have a sequel, though, as political reactions to the report have shown a majority in parliament wants to conduct a more thorough investigation into the matter, granting a subsequent committee the power to question people under oath.

Few surprises

Monday’s proposals to improve the financial system offered few surprises and differed little from measures proposed abroad. De Wit’s committee suggested separating bank's risky business operations from their consumer banking divisions, improving the deposit insurance system, cracking down on certain compensation practices, raising capital reserves and granting additional powers to a pan-European oversight agency. All measures that have been proposed before elsewhere.

Implementing them, however, would require a far-reaching change in the behaviour of politicians, bankers and regulators. According to the committee, parliament itself also needs to draw lessons from the crisis.

The Netherlands followed global trends towards liberalisation and deregulation without hesitation because it wanted its banking sector to play a role of international significance. According to the committee, parliament should have been more critical in this process and kept an eye out for undesirable developments. Instead, parliament failed to conduct its own research and develop expertise, leaving it at the mercy of financial sector lobbyists. When international regulations were introduced, the Dutch parliament was not vigilant enough and failed to challenge the cabinet on the matter.

Political apathy gave banks plenty of room to manoeuvre, which they took full advantage of. Meanwhile,banks took too many risks and tried too hard to please their stockholders.

The committee warned that banking should not now become too sternly regulated. It argued in favour of the self-regulation code introduced by the Dutch banking sector last year which has since been written into law, and also stated the blatantly obvious, that banks need to improve their risk management.

Law should support self regulation

The committee also suggested that individual banks should separate their consumer banking parts, responsible for savings, and their risk-taking parts, which would be allowed to trade on financial markets at their own risk. The committee reported that these measures could best be realised in international concert.

If this proves impossible, the Netherlands should go its way alone, the committee stated. It is very uncertain whether this can be effective ,though. Paradoxically, the committee concluded that the international financial sector has become so closely intertwined that Dutch banks are quickly affected by problems elsewhere.

By arguing for increased regulation, the committee is effectively looking to place more responsibility on the shoulders of oversight agencies, which, it also argued, fell short in the past. The committee criticised the Dutch central bank, DNB, by saying it had a maladaptive culture. The DNB focused too much on individual institutions and showed too much understanding for the banks it oversaw, failing to use all the legal means it had at its disposal. The committee found the DNB could have cracked down on the Icelandic savings bank IceSave, sooner for instance.

The committee said it had been "shocked" by its finding that national interests had undermined trust between oversight agencies from different countries. The committee argued those will have to become more transparent, since trust alone has proven an insufficient foundation for cooperation.

All political parties have come out in favour of the committee's recommendation to introduce stricter regulations. Even De Wit's critical remarks regarding the roles played by the finance ministry and the DNB in the takeover of Dutch bank ABN Amro and the IceSave debacle can count on widespread support.

Gold Could Explode To $3,000 As Confidence In Currencies Collapses

Financial analyst David Rosenberg says gold could explode to $3,000 an ounce as European investors dump the ailing euro in exchange for the precious metal while JP Morgan states that bullion could face unlimited demand as panic buying ensues on the back of crumbling confidence in fiat currencies.

Rosenberg, chief economist at Gluskin Sheff, says the breakdown of the euro is extremely bullish for gold, especially in light of speculation that the ECB could be planning more quantitative easing (printing money).

“The case for gold heading to $3,000 an ounce is getting stronger by the day. The Euro has already broken below 1.30 to the U.S. dollar and there is plenty of room for additional decline going forward. It’s only at a one-year low — wait until it moves to a decade low,” writes Rosenberg.

Rosenberg points out that the problems in Greece, Spain and Portugal have little to do with liquidity and everything to do with “a crisis in confidence”.

“Make no mistake — the problems in Greece are mirrored in places like Portugal and Spain — this is not about liquidity, like Bear Stearns and Lehman, it is a crisis in confidence (Banco Santander, widely seen as a barometer of financial health in Spain, cratered 7% yesterday). The FT reports today that there has been some market chatter that Spain has been “negotiating” with the IMF for assistance (€280bln) too. History shows that crises over confidence are tougher to repair over the near-term than liquidity crunches. The fact that Greek short-term bonds have collapsed in price even more — even though the country does not have to come to the market for the next few years so long as Germany comes through after the vote — is a case in point,” he writes.

JP Morgan’s John Bridges attributes the latest breakout in gold to all time highs to the crumbling confidence in fiat currencies and is recommending clients increase their exposure to the metal.

“When investors lose confidence in currencies, because the pool of gold is so much smaller than the pool of currencies, demand for gold can effectively become unlimited,” said Bridges.

Overwhelming demand for gold in Europe has led to shortages in the precious metal, with the Austrian mint being almost depleted due to “panic buying” from worried Europeans, and demand for silver has also followed suit.

“As long as governments continue to struggle with spiraling debts and are forced to crank up the printing presses, gold will continue to outperform currencies, a situation which is unlikely to change any time soon,” we wrote on April 30.

In the two weeks since then, confidence in the euro has rapidly deteriorated despite gargantuan IMF and EU bailout programs totaling over $1 trillion dollars. The euro enjoyed a brief bounce following the announcement that more taxpayer money would be handed over to European banks, but almost immediately resumed its downward spiral.

Now many financial firms are predicting that the euro will sink to parity with the U.S. dollar, a level not seen for around eight years.

But that’s not to say that the dollar is gaining strength , it only appears so when measured against the even sicker sterling and euro. Gold’s all time dollar record illustrates that every major currency is suffering as governments and central banks crank up the printing presses, ensuring devaluation and future inflation.

Unless the entire approach of dealing with the economic chaos is re-aligned, and banks and other financial institutions are allowed to fail, which at the moment is a remote possibility, gold will continue to soar. So long as there are bailouts, austerity measures, and the riots in the streets that they engender, gold will preserve its status as the go to commodity in times of economic and social peril.

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Why The UK Is The Next European Country To Experience A Massive Debt Crisis

Now that the Greek debt crisis has been "fixed" by a gigantic pile of more debt, many are wondering which European nation will be next to experience a massive debt crisis.

Increasingly, all eyes are turning to the U.K. and their public debt that is spiraling out of control. The U.K. government's deficit is projected to be approximately 13 percent of GDP in 2010, which is even worse than Greece's 12.5 percent figure.

Right now the public debt of the U.K. is "only" at 68 percent of GDP, but three years ago it was sitting at about 40 percent, so as you can see the national debt of the U.K. is absolutely exploding in size. In fact, it is now being projected that the public debt of the U.K. will exceed 100 percent of GDP within the next three years. Considering the fact that citizens of the U.K. are some of the most highly taxed people in the world already, there just is not much room for raising more revenue.

So obviously there is a problem.

A massive, unchecked, out of control problem that threatens to blow out the entire U.K. economy.

And considering the fact that it took just about everything that Europe could muster to bail out poor little Greece, how in the world is Europe going to be able to bail out the U.K. when their debt crisis violently erupts?

If Greece almost brought down the euro and the financial system of Europe, then what would a financial implosion in the U.K. do?

Considering the fact that the Greek economy is approximately 16% the size of the U.K. economy, it is very sobering to think what a "Greek style" debt crisis in the U.K. would mean for the entire world.

But if something is not done rapidly it will happen.

Just consider the following charts....

Now how in the world do you go from a deficit that is between 2 and 3 percent of GDP in 2007 to one that is above 11 percent in 2009? That takes some serious financial mismanagement. Not only that, but as we mentioned earlier, this year the deficit is projected to be approximately 13 percent of GDP. That is a level that is catastrophic.

Kornelius Purps, the fixed income director of Europe's second largest bank is very open about the fact that he believes that the U.K. is likely the next European nation that will face a very serious debt crisis....

"Britain's AAA-rating is highly at risk. The budget deficit is huge at 13% of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that."

In fact, Morgan Stanley has already warned that there is a very strong probability that some of the rating agencies may remove the U.K.'s AAA status before 2010 is over.

If that happened, it would make the crisis that we just saw in Greece look like a Sunday picnic.

So what must be done?

Well, already world financial authorities are calling for "austerity measures" and deep budget cuts to be implemented in the U.K., but the reality is that those moves will cause deep economic pain.

In fact, Bank of England governor Mervyn King recently warned that public anger over the "austerity measures" that soon must be implemented in the U.K. will be so painful that whichever party is seen as responsible will be out of power for a generation.

The cold, hard reality is that the U.K. is in for economic pain in any event. Either they cut the budget and implement severe "austerity measures" which will hit people really hard economically, or they continue on the current course and risk a much worse version of what just happened in Greece.

Not that the rest of the world should be gloating about what is going on in the U.K. either.

The financial situation in Japan is even worse than what the U.K. is dealing with, and the United States is going to have the biggest economic downfall of them all one of these days.

As we wrote about yesterday, the sad truth is that the governments of the world are rapidly running out of money and are drowning in debt. It is a gigantic mess, and the term "sovereign debt crisis" is going to pop up in the news very regularly from now on.

You see, it is not just the financial systems of the U.S. and the U.K. that are broken. The entire world financial system is fundamentally flawed and is doomed to failure.

Right now the central banks of the world can do their best to try to hold things together with a tsunami of debt and paper money, but they are not going to be able to keep up this balancing act forever.

When it does all start coming apart and the dominoes do start falling, it is going to be a complete and total nightmare. Paper currencies around the globe will lose value at breathtaking speeds as central banks flood economies with cash in an attempt to stop the madness.

But more debt and more paper never solves anything. All it does is make the long-term problems even worse.

When the tipping point comes, things are going to move fast. Let's just hope that we all have a good bit more time to prepare before that happens.

This guest post previously appeared at the author's blog.

Greek debt crisis: IMF predicts more pain for Athens

Bleak report on Greece's future by IMF team predicts slow and painful recovery coupled with sharp rise in unemployment

The debt crisis has provoked many demonstrations in the capital Athens. Photograph: YIORGOS KARAHALIS/REUTERS

Greece's economic recovery will be rockier and more painful than anticipated – with slow growth rates and a steep rise in unemployment – as recession in the debt-choked country deepens, according to the International Monetary Fund.

The bleak assessment, on the eve of the first instalment by the Washington-based body of a multimillion-euro bailout to Athens, underscores the concerns about the IMF-EU sponsored program.

Although the IMF helped draw up the accord under which emergency loans of up to €110bn will be disbursed to Greece until 2013, there are several risks that could scupper the rescue plan.

Greeks could find themselves fending off bankruptcy again if reforms to improve productivity and the nation's unusually low competitiveness are not enacted quickly.

"[Success] hinges on deep and comprehensive structural reforms," said the report, drafted by an IMF delegation which visited Athens on a two-week fact-finding mission before the deal was reached.

"Without such reforms, Greece would not restore competitiveness or growth, and real incomes will remain stagnant and unemployment high and the debt burden would eventually prove unsustainable," it concluded.

While praising Prime Minister George Papandreou's six-month-old government for its bold fiscal policies, the assessment questioned the administration's ability to enforce draconian austerity measures in return for the loans.

There was, it said, "an undeniably high" danger that the program could become unstuck if the ruling socialists gave in to widespread public hostility over the €30bn spending cuts and tax hikes.

Greek unions have vowed to step up action against the government's latest reform – the overhaul of the pension system that is key to the IMF agreement – with street protests and a general strike on 20 May.

"The IMF will not stop thirsting for workers' blood," said Yannis Panagopoulos, who heads the country's biggest union, GSEE.

The eurozone's weakest link, Greece is currently tackling a public deficit of 13.6% – the highest in the EU – and debts of €300bn.

But the fiscal indicators are likely to worsen before they get better. As a result of the cost-cutting measures foreseen in the rescue package, the IMF predicted that recession would deepen, with Athens' debt-to-GDP ratio reaching 176% in the "worst-case scenario".

The vicious cycle could mean yet more money being poured into the banking sector – to prevent its collapse – a move that would see Greece's public debt increasing further.

Budget plan short of erasing deficit

CONCORD – The state’s budget deficit gap has widened to a projected $290 million and thus far state House of Representatives budget writers failed to come up with enough proposed revisions to erase the entire deficit.

Numbers released Tuesday by the Departments of Revenue and Administrative Services predict a $200 million shortfall in revenue this biennium. The governor had estimated revenue would come in about $130 million short. But when adding other factors, such as the loss of money from the Joint Underwriting Association’s medical malpractice fund, the total budget shortfall that the state is facing could be close to $290 million.

“The governor has already put forward a plan to address $220 million, and he will continue to work with lawmakers in addressing this very serious challenge,” said Lynch spokesman Colin Manning.

The new numbers came out just days after the departments released revenue numbers from April that were significantly lower than expected.

“What you saw in April is what’s going to be sustained through the end of this fiscal year and the first half of next year,” predicted Revenue Commissioner Kevin Clougherty.

As of the end of April, the state had taken in $98 million less than expected. The Department of Administrative Services, in a Senate Ways and Means Committee hearing yesterday, predicted that the state would close the 2010 fiscal year in June with a $119.7 million revenue shortfall and would have a shortfall of $79.3 million in fiscal year 2011.

Until Tuesday, the plan to address the budget deficit fell about $40 million short of erasing it. That hole is now predicted at about $110 million. The extensive plan from House budget writers, which is headed for a showdown vote in the House this week, addresses $181 million of the deficit. Though the proposal falls short of solving the deficit, the group hopes it contains enough spending cuts, tax increases and debt reshuffling to demonstrate they’re serious about tackling the problem this year.

Manning said the new numbers show the continuing impact of the recession.

“The recession is something we’ve been dealing with for the past two years now,” Manning said. He said Lynch will continue to work with the House and Senate “on a bill we can support that will work to address this challenge.”

House Finance Committee Chairwoman Marjorie Smith, D-Durham, repeatedly told her colleagues that their job was to make a good-faith effort and not to rewrite the budget.

'We are not coming up with a new state budget,” Smith said. “These are changes we are making to seriously respond to our shortfall.”

Rep. Neal Kurk, R-Weare, the ranking GOP member of the budget panel, said it failed to go far enough.

“There are a lot of things we can do more than this to fundamentally alter the size of state government,’’ Kurk said. “I respect the wishes of the majority, but this just doesn’t do the whole job.’’

The spending cuts in the package – $37 million – are only about half of what Gov. John Lynch proposed last month, Kurk said.

The largest cut Lynch wanted that didn’t make the grade was taking $4 million out of the judicial branch budget. Supreme Court Chief Justice John Broderick led an aggressive lobbying effort that included visits to newspaper editorial boards across the state.

This proposal (SB 450) nonetheless makes dramatic changes: raising two new taxes, raising two others, closing a state prison and moving the state detention center into new quarters, along with laying off more than 65 state workers.

Smith said that when Lynch gave the committee his proposals three weeks ago, she didn’t think the panel could endorse as much as it did.

“We went further than I initially thought we’d be capable of doing,’’ Smith said last week after the House Finance Committee endorsed the plan on a 13-12 vote.

The biggest move the plan makes is to close the leased state Prison for Women in Goffstown and move all inmates to the Sununu Youth Services Center in Manchester.

The Sununu building houses criminally delinquent and truant juveniles. Their numbers have shrunk by half over the past four years, and Smith said the site could be better used as a prison for women.

The juveniles would be moved to two vacant halfway houses on the grounds of the former Laconia State School property.

Smith said she made the proposal because studies have shown that conditions at the women’s jail are deplorable and that options for women to have programs while behind bars are woefully inadequate.

Some prisoner-rights advocates assert the state could be vulnerable to a federal lawsuit lodged against their treatment of female inmates.

Sen. Lou D’Allesandro, D-Manchester, said Smith’s plan is worth taking a look at, but should not be stuck into this budget bill without a public hearing.

“I just think we should take a year to study this,’’ D’Allesandro said.

Rep. Fran Wendelboe, R-New Hampton, said she’ll ask the House to strip that provision next week and replace it with a study committee.

Lynch also proposed to raise $20 million in more taxes, but from a single source: cigarette sales.

Polls of New Hampshire voters show this tax is the most popular among them, since fewer than three in 10 adults smoke.

House budget writers decided against that because of opposition from convenience and retail store owners as well as tobacco lobbyists. They said the move risked losing too much business from out-of-state patrons who wouldn’t bother making the trip over the border, and that Massachusetts joining Powerball had already robbed the state of many customers.

Instead, Smith and allies turned to raising taxes on groups that also aren’t in favor among the working class: owners of insurance and electric utility companies and those who are the heirs to multimillionaires.

Smith said these changes, which are estimated to raise more than $33 million, wouldn’t hurt the business community, as it’s struggling to recover from the worst recession since the Great Depression.

But Kurk said raising taxes in this down economy sends the wrong message to companies looking to locate or expand here once the state is back on the rebound.

D’Allesandro said he would offer his own balanced-budget moves later this week.

Kevin Landrigan can be reached at 321-7040 or klandrigan@nashuatelegraph.com. Concord Monitor Staff Writer Shira Shoenberg contributed to this report.

State revenue falls short

LINCOLN — At least one state senator believes a special budget-cutting session looks more likely, with Nebraska tax revenues falling $56 million behind projections for the year to date.

But other state officials saw a few glimmers of hope in a report released Monday on April tax revenues.
Gov. Dave Heineman said the report from the state Revenue Department sent a mixed message about the state’s economy.

“While April receipts are disappointing, there are early signs of an improved economy,” Heineman said, noting that business officials tell him they are starting to add hours and increase production.

“I am cautiously hopeful about the future, but I fully expect bumps along the road to a broader economic recovery,” he said.

State Sen. Lavon Heidemann of Elk Creek, chairman of the Legislature’s Appropriations Committee, sounded a similar note.

Lower-than-expected income tax payments reflect last year’s struggling economy, he said.

Net individual income tax revenues were $46 million, or 24 percent, below projections for April. Corporate income tax revenues were $6 million, or 28 percent, lower than expected.

But state sales tax revenues were up slightly — $2.5 million, or 2 percent, for the month — compared with projections, Heidemann said.

Sales taxes reflect more current economic activity, he said.

Sen. Heath Mello of Omaha, an Appropriations Committee member, sees more ominous signs when looking at the revenue report and other business indicators.

The state has fallen short of the February revenue forecast in two of the three months since then, while unemployment rates have risen over the last four months.

“I believe the need for a special legislative session looks more like reality,” Mello said. “We cannot look at this year’s unemployment and revenue trends with rose-colored glasses.”

He said the May revenue report will be telling about whether lawmakers will need to come back early to Lincoln.

Both Heineman and Heidemann said the April report is not gloomy enough to require calling legislators back for another budget-cutting special session.

“Not at this time,” the governor said, about calling a special session. “We’re going to watch it very, very closely.”

Heidemann said the state should have enough money in its reserves to pay bills through the end of the current fiscal year.

But officials, he said, will monitor May and June tax revenues more carefully than usual.

“This isn’t good news, but it isn’t bad enough to come back into special session to tweak things” this far into the two-year budget period, Heidemann said.

Lawmakers confronted a larger budget gap when they met in November, just five months into the budget biennium ending July 30, 2011.

The governor called the special legislative session at that point to deal with a projected $334 million budget gap.

The gap opened when the state’s official revenue forecasting board met in October and lowered revenue projections for the biennium.

The board lowered its forecast again in February, forcing a new but smaller round of cuts.

April typically is a big month for state tax revenues because it is the month when income tax filings are due.

State income tax revenue falls short

The state's expected revenue from personal income taxes fell about $3 billion short of expectations in April, prompting concern about further state cuts as the governor prepares to submit a revised budget to the Legislature.

When Gov. Arnold Schwarzenegger submitted his 2010-11 fiscal-year budget in January, state finance officials estimated that personal income tax revenue would be about $10.5 billion in April.

Instead, actual revenue came in at $7.4 billion, said H.D. Palmer, deputy director of external affairs for the state's Department of Finance.

In a state facing a nearly $20-billion budget deficit, April is a critical month for the state's finances, State Controller John Chiang said.

In the last fiscal year, personal income taxes made up 51.3 percent of all state general fund revenues, according to Chiang's office. Of that revenue, nearly 17 percent arrived in April.

"It highlights the fact that the governor and Legislature need to get to work and get a budget in place as quickly as possible that has strong, tough solutions to what the state currently faces," Chiang said.

What it faces is billions in deficits that Schwarzenegger will seek to fill in his revised budget due on May 14. But filling them could mean difficult choices on a range of state-funded programs, and that had some observers skeptical if not indignant.

"It's hogwash," said Mark Skvarna, superintendent of the Baldwin Park Unified

School District.

He noted that the general tax revenues have actually increased so far this year - until April.

Overshooting on estimates of state income tax revenue was just a prelude to announcing more cuts, said Skvarna, who vehemently defended education funding.

"We all knew it was pie in the sky," he said of the governor's original projections. "I've got news for you. I've got nowhere else to cut. I'm not going to play into it. It's that simple."

Jeff Collier, Whittier's community development director, wasn't surprised at the news that revenue was falling short.

He referred to the administration's efforts to fill the budget gap as "smoke and mirrors."

"They got real creative," he said of state officials.

But in this economy, it's not easy to make accurate projections for income, said State Sen. Bob Huff, R-Walnut.

"In a recession as deep as this was, it's a hard thing to quantify," Huff said.

State finance officials said they were still analyzing the numbers, and looking at why the real numbers didn't hit those forecasted.

Palmer pointed to a variety of possible factors, including lower business revenues, the timing of tax laws and losses from capital gains.

The capital gains issue would make sense, according to Nancy Sidhu, chief economist for the Los Angeles County Economic Development Corp.

If you lost money on the stock market early last year, those losses would be reflected on your 2009 returns, she said.

"In April, everybody has to come to the truth of what they were doing in terms of buying and selling securities," Sidhu said.

The state is now feeling that truth.

Despite the fact that general fund revenue was up by $2.7 billion above forecasts from January to March, officials said, a massive deficit remains, and lower-than-expected income tax revenue won't help.

"Now, (Schwarzenegger) has got to find a way around it," Sidhu said. "The choices are not pleasant. It means either revenues have to go up or spending has to come down. Those are not happy choices."

So far, the Legislature has shaved about $1.4 billion off the state's budget deficit, which the Legislative Analyst's Office says tops $20 billion.

Officials from Chiang to the finance department were looking for more gaps to be filled - and soon.

"This is a situation where time is money," Palmer said.