Corona debt: €5.400 for every citizen?!

The Netherlands is expected to run a historical budget deficit of €92 billion, or 12% of GDP in 2020. This amounts to approximately €5.400,- per capita, which is truly unprecedented in times of peace. Only once has the Kingdom of the Netherlands experienced a higher budget deficit, which occurred at the end of World War II, when it peaked at 15% of GDP. The previous high (or low, if you will) was in 2010, when the budget deficit hit 5,2% of GDP in the aftermath of the economic crisis of 2008/2009. You see, the corona crisis has also damaged the national budget. The enormous deficit will lead to a spike in the national debt, which is projected to rise to 65% of GDP. Under normal circumstances, European governments are confined to a budget deficit of 3% and a national debt of 60% as agreed upon in the Stability and Growth Pact. However, the European Commission is allowing countries to exceed these norms in order to fight the economic consequences of the corona virus. The Dutch government is making full use of this extra space in the national budget.

Where is the money going?

Currently, the government is injecting liquidity into the private sector by means of nine different facilities. Entrepreneurs that are hit by the government's measures to fight the virus can apply for a onetime grant of €4.000,- in order to pay the rent on buildings. This measure is known as the TOGS. Another measure is the TOZO, a temporary liquidity facility for entrepreneurs that allows them to live at least at the social minimum. Under this facility, up to €1.500,- can be borrowed which has to be repaid. The third major facility is the NOW, a program whereby the government pays up to 90% of a company’s wage expenses, provided that it expects to lose at least 20% of its revenue over three months and doesn’t fire workers. Furthermore, the fiscal authorities allow companies to defer their taxes and settle 2020 losses with 2019 profits. Besides, the government is guaranteeing loans to small, midsized and larger companies in order to reassure the banking system and keep private credit flowing. Hence, the government is not only spending more, it also receives less as the IMF expects the Dutch economy to shrink by 7,5% this year. This list is not exhaustive, but it makes clear that the government is really doing everything it can to keep businesses afloat.

"The government is not only spending more, it also receives less"

The above mentioned facilities are for now scheduled to run until June 1st. The total package is expected to cost around €20 billion, while new emergency measures are in the making. Moreover, the Dutch Treasury will miss an estimated 35-45 billion euros in revenue due to deferred tax payments. On top of that, the government has vowed to rescue Dutch multinationals on the brink of collapse, such as KLM. The Dutch airliner can count on up to €4 billion in loans and guarantees.

Where is the money coming from?

In order to finance the corona expenses, the Dutch Ministry of Finance is issuing new short term debt securities in the money market as well as long term bonds in the capital market. In normal times, the Ministry issues Dutch Treasury Certificates (DTC’s) with three-months and six-month maturities and does so every two weeks. This quarter, these certificates will be issued every week and longer maturities are a possibility that is being considered. Regarding longer term financing, the Ministry is reopening a ten-year Dutch State Loan (DSL). Specifically the DSL 2030 bond is being reissued in order to attract up to €6 billion in cash over three auctions. During the most recent offering, approximately €2 billion was raised against a negative interest rate of -0,120%. This is to say, the government gets paid to borrow money, even for a bond that matures in 10 years.

" €2 billion was raised against a negative interest rate of -0,120%"

Two more auctions are scheduled for this quarter. Furthermore, the Ministry is reissuing the DSL 2047 while aiming to raise up to €1.25 billion in cash from the markets. The effective yield on this bond is yet unknown, as the price is announced just before the auction starts. On top of these bonds, the Ministry is considering the reopening of a 20-year Green Bond.

Consequences

The exploding budget deficit and national debt regularly make the headlines, but for now there is little reason to panic. First of all, the state is perfectly capable of raising cash from financial markets, as can be witnessed from the negative interest rates on newly issued bonds. Second, the national debt was below 50% of GDP before the corona crisis broke out, which is relatively low in Europe. When this rises to 65%, which is an estimate surrounded with uncertainty, the national debt level is still only a bit over the maximum allowed level of 60%. Moreover, the European Commission has already announced its intent to relax deficit rules, so no fines in sight either. Thirdly, large parts of the injected liquidity will come back later as these are mere loans that have to be repaid. Professor Bas Jacobs estimates that the budget deficit would in fact be around 6 to 7% when we take the deferred taxes and repayment of liquidity injections into account. All in all, there is currently no reason to panic about the astronomical budget deficit.

" There is no reason to panic about the astronomical budget deficit"

However, former President of the Dutch Central Bank Nout Wellink is less optimistic about the future. He warns that our welfare is going to take a big hit of around 5 to 15% of GDP and that the country will have to adjust to these new circumstances. In other words, future austerity measures could be inevitable, despite the recent comments of Prime Minister Mark Rutte that no one is currently thinking about cutting back expenses. Who of the two turns out to be right remains to be seen.

Conclusion

The Dutch government is all of a sudden facing one of the highest budget deficit in the country’s history. A deficit of €92 billion is expected, which will raise the national debt to an estimated level of 65% of GDP. Although the exact numbers are highly uncertain, it is clear that the government has to raise a lot of cash in the financial markets. Because of the healthy financial conditions, the government is easily able to do so and even receives interest for borrowing long-term. Whether this historical deficit means that future austerity measures are necessary is yet unknown, but so far the government is doing a great job and faces no direct financial problems.

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