VZCZCXRO8946
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHTC #2053/01 3451511
ZNR UUUUU ZZH
P 111511Z DEC 07
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 0810
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHBS/USEU BRUSSELS 0608
RUEHAT/AMCONSUL AMSTERDAM 3847
RUEHFT/AMCONSUL FRANKFURT 3827

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