VZCZCXRO8762
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHTC #0910/01 3040801
ZNR UUUUU ZZH
P 300801Z OCT 08
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 2166
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHRK/AMEMBASSY REYKJAVIK PRIORITY 0038
RUEHAT/AMCONSUL AMSTERDAM PRIORITY 4039
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 05 THE HAGUE 000910 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD - INTERNATIONAL DIVISION, 
TREASURY FOR IMI/OASIA.VATUKORALA,USDOC FOR 
4212/USFCS/MAC/EURA/OWE/DCALVERT 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV PREL NL
SUBJECT: NETHERLANDS: DUTCH GOVERNMENT TAKES STEPS TO SHORE 
UP FINANCIAL SECTOR 
 
REF: A. THE HAGUE 840 
     ¶B. THE HAGUE 885 
 
THE HAGUE 00000910  001.2 OF 005 
 
 
¶1. (SBU) Summary:  The Government of the Netherlands (GONL) 
instituted a series of preemptive measures in October to 
protect the vulnerable Dutch financial sector from the 
external shocks of the global financial crisis.  Following 
the United Kingdom,s lead, the GONL announced a EUR 20 
billion (USD 25 billion) emergency fund to provide liquidity 
to financial institutions in need.  Dutch banking and 
insurance giant ING was the first Dutch company to take 
advantage of the fund October 19 when the GONL announced an 
injection of EUR 10 billion (USD 12.5 billion) into ING as 
buffer capital.  Insurance and pension fund giant AEGON was 
the second, taking EUR 3 billion (USD 3.75 billion) from the 
GONL on October 28.  Additional GONL actions include raising 
the guarantee on individual and small business bank deposits 
from EUR 38,000 (USD 47,500) to EUR 100,000 (USD 125,000), as 
well as paying for portions of Dutch savings lost in the 
collapse of Icelandic Internet bank Icesave.  In keeping with 
similar actions throughout the EU, the GONL launched a new 
EUR 200 billion (USD 250 billion) facility to guarantee 
inter-bank loans, and it expanded the guarantee scheme for 
loans to Dutch companies.  While the financial crisis is 
taking a toll on the Dutch financial sector, it is weathering 
the storm thanks to well capitalized institutions and quick 
government intervention.  The crisis has bolstered public 
opinion of Prime Minister Balkenende,s coalition government, 
at least temporarily.  Given its role as a global financial 
player, the Netherlands is asking the U.S. for a seat at the 
table when the G20 meets November 15.  End summary. 
 
--------------------------------------------- - 
ING AND AEGON TAKE ADVANTAGE OF EMERGENCY FUND 
--------------------------------------------- - 
 
¶2. (U) Following the United Kingdom,s lead, the GONL 
announced the creation of a EUR 20 billion (USD 25 billion) 
emergency fund on October 9 to provide liquidity to financial 
institutions in need.  Finance Minister Wouter Bos and 
Central Bank President Nout Wellink emphasized that the fund 
is to protect healthy financial institutions from the 
shockwaves of the global credit crisis, not to provide 
emergency bailouts for weak banks.  (Note:  Per ref A, the 
GONL already has been forced to conduct one bailout; on 
October 3, it nationalized all of Belgian-Dutch bank Fortis, 
Dutch operations ) including Fortis, Dutch subsidiary ABN 
AMRO ) to the tune of EUR 16.8 billion (USD 21 billion). 
End note.) 
 
¶3. (U) On October 19, the Dutch banking and insurance group 
ING became the first Dutch company to take advantage of the 
emergency fund when the GONL announced an injection of EUR 10 
billion (USD 12.5 billion) into ING as buffer capital.  On 
October 28, Dutch insurance and pension fund giant AEGON 
(owner of U.S. insurer Transamerica) became the second 
company to dip into the fund, accepting 3 billion (USD 3.75 
billion) from the GONL.  The conditions of the deal are the 
same for both companies.  In return for buffer capital, the 
GONL will receive preference securities yielding 8.5 percent 
interest.  However, ING and AEGON will only have to pay this 
interest if they have paid out dividends to common 
Qinterest if they have paid out dividends to common 
shareholders over the previous year.  (This protects ING and 
AEGON from paying interest to the government if they are 
cash-strapped.)  Also, if the companies, dividend yields 
rise above 8.5 percent (a highly unlikely scenario), then the 
coupon on the government,s securities will rise as well. 
 
¶4. (U) The government extracted a few key concessions from 
ING and AEGON.  First, the GONL will get two seats on each 
company,s supervisory board, with veto power over strategic 
plans and remuneration policy.  Second, all of their senior 
executives will forego 2008 bonuses, and all "golden 
parachutes" will be capped at one year,s base salary. 
Third, ING and AEGON can buy out the government,s securities 
at 150 percent of the issue price, or they can convert them 
to common shares after three years, which would require 
shareholder approval. 
 
¶5. (SBU) The presence of toxic U.S. mortgage assets on ING 
and AEGON,s books and subsequent loss of shareholder 
confidence remain the primary culprits behind their decisions 
to accept GONL capital.  ING Chairman Michel Tilmant told 
 
THE HAGUE 00000910  002.2 OF 005 
 
 
Treasury DAS Mark Sobel on September 10 that ING Direct (its 
U.S. subsidiary) had bought mortgage securities it really did 
not want.  ING announced October 17 that it expected a EUR 
500 million (USD 625 million) loss for the third quarter as a 
result of over EUR 3 billion (USD 3.75 billion) in 
write-downs.  This news triggered ING,s share price to fall 
27 percent on October 17 (from EUR 10.11 to 34); by October 
28, it was trading at EUR 5.75 (USD 7.18).  Meanwhile, AEGON 
announced October 28 that it expects third quarter earnings 
to decline 28 percent to approximately EUR 500 million (USD 
625 million), with a net quarterly loss of about EUR 350 
million (USD 437.5 million) due to &increased import charges 
and lower financial markets.8  AEGON shares fell over 9 
percent October 28 to close at EUR 3.06 (USD 3.82); they have 
lost 50 percent of their value since October 1. 
 
¶6. (SBU) Comment:  ING and AEGON,s decision to dip into the 
GONL,s emergency fund are very different situations than the 
GONL,s nationalization of parts of Fortis.  Unlike Fortis, 
which faced severe liquidity shortages, ING and AEGON remain 
well-capitalized, relatively healthy banks.  The main 
benefits of the capital injection for both institutions are a 
higher Tier I (or core) capital ratio and no dilution of 
current shareholders.  ING CFO John Hele (who announced 
October 22 that he will leave ING in March 2009 to become CFO 
of Arch Capital Group in the U.S.) said that the new capital 
"gives us time to weather the storm."  AEGON CEO Alex 
Wynaendts noted that the deal will allow AEGON to "enter 2009 
with a significantly reinforced capital position."  The Dutch 
Central Bank added that, "with this capital reinforcement, 
AEGON remains a healthy and well-managed insurance company 
that has strong buffer capital."  These seem fair 
assessments.  Rather than going to the private markets to 
raise more capital at punitive rates, ING and AEGON opted for 
a more lenient deal from the GONL and can repay the GONL when 
they are ready.  To put these cases in perspective, they are 
similar to moves the UK, Germany, and others have taken 
recently to shore up capital levels at large, solvent banks 
such as Barclays HSBC, and Bayern LB.  They are also similar 
to the U.S. Treasury,s moves to acquire limited stakes in 
U.S. banks.  ING and AEGON likely will not be the only Dutch 
financial institutions to tap into the government,s 
emergency fund, despite other banks, assurances that they 
will not avail themselves of the fund.  Meanwhile, Rabobank 
continues to assert that it does not need, and will not 
request, any capital injection from the GONL.  End comment. 
 
------------------------------------------ 
OTHER EFFORTS TO SHORE UP FINANCIAL SECTOR 
------------------------------------------ 
 
¶7. (SBU) In addition to the EUR 20 billion emergency fund, 
the GONL has taken several other measures to, in the words of 
the Central Bank, "safeguard the stability of, and confidence 
in, the (Dutch) system and to protect the financial 
enterprises within it."  On October 7, the GONL raised the 
guarantee on individual and small business bank deposits from 
EUR 38,000 (USD 47,500) to EUR 100,000 (USD 125,000) for a 
period of one year ) double the EUR 50,000 (USD 62,500) 
Qperiod of one year ) double the EUR 50,000 (USD 62,500) 
limit agreed upon by European Union finance ministers on 
October 8.  While Dutch media, members of parliament, and 
many in the business community applauded the announcement, 
the Netherlands, largest banks ) Rabobank in particular -- 
expressed concern about having to foot the bill for the new 
guarantee.  Traditionally, any costs of the guarantee are 
divided among all Dutch banks in proportion to their share of 
the savings market.  Because market leader Rabobank holds 
roughly 40 percent of Dutch savings accounts, it bears the 
lion,s share of the burden for any Dutch bank that becomes 
insolvent.  Rabobank announced October 23 that "for the time 
being" it would refuse to pay for the increase in the GONL 
guarantee to EUR 100,000.  Instead, Rabobank asserted that 
the GONL should be required to pay for its own decision and 
use taxpayer money to cover any costs in excess of the 
original EUR 38,000 guarantee.  The GONL estimates that Dutch 
banks hold a total of EUR 260 billion (USD 325 billion) in 
domestic savings; it has not offered any estimates of the 
amount of savings held in foreign branches of Dutch banks. 
 
¶8. (SBU) Some small international banks headquartered in the 
Netherlands are taking advantage of the GONL,s higher 
savings guarantee, using it as an advertising tool to attract 
deposits in other countries.  Local financial media have 
 
THE HAGUE 00000910  003.2 OF 005 
 
 
highlighted small Turkish and Russian banks like AK Bank, 
Demir-Halk Bank, Garantibank, and Amsterdam Trade Bank as 
using this tactic.  Some in parliament and the Dutch banking 
community are calling for the GONL to limit the terms of the 
new guarantee to only local Dutch savings accounts, not 
accounts at foreign branches of banks that may have their 
headquarters in Holland, but which do most of their business 
abroad.  Currently, however, the Turkish and Russian banks 
are within their rights, since GONL policy is that "all Dutch 
banks that operate under a license from the Dutch National 
(Central) Bank are covered by the Dutch deposit guarantee 
scheme." 
 
¶9. (U) To date, the GONL has had to execute the savings 
guarantee for only one insolvent bank: Icesave.  Ironically, 
although the guarantee applies only to Dutch banks, Icesave 
is not headquartered in Holland.  It is an Internet bank with 
no storefront locations that is headquartered in Iceland; it 
is a subsidiary of Landsbanki.  The GONL agreed in this case 
to guarantee savings in a foreign bank because since Icesave 
opened in May 2008, the high interest rates it offered had 
attracted 120,000 Dutch clients and a total of EUR 1.6 
billion (USD 2 billion) in Dutch savings.  When Icesave 
declared bankruptcy October 8, those Dutch savers looked to 
the GONL for rescue.  The GONL therefore concluded a deal 
October 12 with the Government of Iceland in which Icelandic 
authorities will borrow money from the GONL to pay the first 
EUR 20,877 (USD 26,096) of each Dutch citizen,s Icesave 
holdings, and the GONL will pay the remainder up to EUR 
100,000 (USD 125,000). 
 
¶10. (U) Meanwhile, the GONL is helping several Dutch 
municipalities to negotiate a separate deal with the 
Government of Iceland to recover a total of EUR 225.8 million 
(USD 282.25 million) that they had deposited in Icesave and 
other failed Icelandic banks (also to take advantage of the 
high interest rates).  In conjunction with the Ministries of 
Finance and Home Affairs, the provinces of North Holland, 
South Holland, Groningen, the Federation of Water Boards, and 
the Association of Netherlands Municipalities will submit a 
joint claim to the Government of Iceland to recover their 
lost savings.  The GONL also will examine these bodies, 
finances for additional sources of exposure and is 
considering whether to tighten the rules for local 
authorities, investments in foreign banks. 
 
¶11. (U) In keeping with similar actions throughout the EU, 
the GONL launched a new EUR 200 billion (USD 250 billion) 
facility October 23 to guarantee inter-bank loans and loans 
from institutional investors to banks.  Prime Minister 
Balkenende noted that, while banks could take advantage of 
the new EUR 20 billion (USD 25 billion) emergency fund to 
provide liquidity in the short term, the inter-bank loan 
guarantee was needed to kick start the flow of funds for the 
medium term.  According to the Ministry of Finance, the 
guarantee scheme targets non-complex senior unsecured loans, 
"plain vanilla" commercial paper, certificates of deposit, 
and medium-term notes, with maturities ranging from 3 to 36 
months.  The GONL will examine a bank,s solvency and 
liquidity profile when reviewing its application to access 
Qliquidity profile when reviewing its application to access 
the facility, and participating banks must agree to 
additional requirements on corporate governance with respect 
to bonuses and resignation premiums. 
 
¶12. (U) Minister of Economic Affairs Maria van der Hoeven 
announced October 21 that her ministry was expanding the 
guarantee scheme for bank loans to companies.  After 
consulting with company representative and employer 
organizations, the ministry agreed that companies with up to 
250 employees will now be able to call on the credit 
guarantee scheme; in the past, only companies with up to 100 
employees could qualify.  The ministry also increased the 
amount of the guarantee by 50 percent to EUR 1.5 million (USD 
1.87 million) per loan, and it doubled the amount available 
to start-ups from a maximum of EUR 100,000 to EUR 200,000 
(USD 250,000).  Bernard Wientjes, the president of the 
employers, organization VNO-NCW, praised van der Hoeven,s 
decision, adding that his organization also wants the 
minister to consider a credit facility for larger companies 
and possibly new investment in the Dutch construction sector. 
 
--------------------------------------------- -------------- 
ECONOMIC AND POLITICAL IMPLICATIONS OF THE FINANCIAL CRISIS 
 
THE HAGUE 00000910  004.2 OF 005 
 
 
--------------------------------------------- -------------- 
 
¶13. (SBU) The Dutch financial sector, like most in Europe, is 
suffering from the effects of the global crisis, but it is 
weathering the storm thanks to well capitalized institutions 
and quick government intervention.  The GONL,s decision to 
nationalize the Dutch operations of Fortis (including ABN 
AMRO) has been its most serious market intervention to date. 
Although ING and AEGON opted to take advantage of the GONL,s 
emergency fund, they do not appear to be in imminent danger 
of bankruptcy or nationalization.  Dutch banks have 
significant exposure to U.S.-based assets; the Central Bank 
reported that at the end of the second quarter of 2008, 
approximately one-fifth of all Dutch direct and portfolio 
investments, or EUR 322 billion (USD 402 billion), was in 
U.S.-based assets.  By comparison, Dutch investment in 
British assets (which rank second on the Dutch foreign 
investment list) totaled only EUR 195 billion (USD 244 
billion).  Investor confidence in Dutch institutions remains 
a key determinant of financial sector health, with reports 
(and sometimes just rumors) of losses due to write-downs of 
U.S.-backed assets sending companies, share prices into a 
tailspin and creating enormous volatility in the Dutch stock 
market.  The Netherlands, AEX index has lost 58 percent of 
its value since the beginning of 2008, down from 518.27 on 
January 2 to 214.56 on October 28.  ING shares have lost 78 
percent of their value over the same period, from EUR 26.74 
to EUR 5.75 (USD 7.19).  AEGON shares are down 79 percent, 
from EUR 14.59 to EUR 3.06 (USD 3.82).  Fortis shares tell an 
even bleaker story, down 95 percent from EUR 18.38 to EUR .79 
(USD .99). 
 
¶14. (SBU) Comment:  While the financial crisis is taking a 
toll on the Dutch financial sector, it has bolstered public 
opinion of Prime Minister Balkenende,s coalition government 
) particularly Finance Minister Wouter Bos.  Bos is the hero 
of the day, having orchestrated most of the government,s 
interventions, including the nationalization of Fortis, 
Dutch operations which returned ABN AMRO to Dutch ownership 
) a source of pride for many Dutch citizens who resented the 
foreign takeover of a leading Dutch bank in 2007.  The 
government has endured harsh criticism for pushing through 
policies that it asserts are necessary for the health of the 
Dutch economy, but which are deeply unpopular with the Dutch 
public.  These include a new aviation tax (ref B) and changes 
in labor laws and the state pension system.  Beginning 
October 3 with the Fortis nationalization, however, the Dutch 
public, parliament, and media have reacted favorably to the 
government,s interventions.  The emergency bank fund and 
array of guarantee schemes are generally viewed as necessary 
and effective in creating liquidity and shoring up investor 
confidence.  Employer organizations have been supportive of 
the government,s actions, and labor unions have demanded 
only moderate wage increases, just enough to keep pace with 
expected inflation.  As the effects of the financial crisis 
begin to creep into the rest of the Dutch economy, however, 
the parliament, public, and media will begin asking tough 
questions about the cost and effectiveness of government 
Qquestions about the cost and effectiveness of government 
intervention. 
 
------------------------------------- 
IMPLICATIONS FOR U.S.-DUTCH RELATIONS 
------------------------------------- 
 
¶15. (SBU) Comment continued:  The Netherlands and the United 
States remain staunch defenders of free market principles, 
despite the necessity of government intervention in their 
respective financial markets.  While some Dutch government 
and business leaders publicly blame the United States for 
causing the crisis, most recognize that the 
interconnectedness of global markets ) something which the 
Dutch fervently support ) is responsible for the current 
domestic turmoil.  A notable exception is Finance Minister 
Bos (also leader of the Labor Party (PdvA) and Deputy Prime 
Minister), who has been a consistently harsh critic of the 
United States, repeatedly blaming lack of USG oversight and 
rampant corporate greed for the crisis. 
 
¶16. (SBU) Comment continued:  The Netherlands does not have 
the international clout or recognition for its quick efforts 
that it believes it should in this crisis.  It is 
particularly upset by not being invited to participate in the 
November 15 meeting of the G20.  It is pushing hard for a 
 
THE HAGUE 00000910  005.2 OF 005 
 
 
seat at the table, having senior Dutch officials call their 
U.S. counterparts (i.e., Bos to Treasury Secretary Paulson; 
Foreign Minister Verhagen to Secretary Rice).  The Dutch 
argue that they are a global financial player with a 
tremendous amount at stake in any discussion of restructuring 
international financial markets.  Regardless of Bos, 
anti-U.S. comments and the question of the G20 invitation, 
however, the financial crisis is unlikely to damage 
U.S.-Dutch relations in the long run.  End comment. 
CULBERTSON