ANALYSIS: Cuba on the North Sea

Dutch finance minister Jeroen Dijsselbloem sent shockwaves through the Netherlands and the world last week when he nationalised SNS Reaal, the country's fourth largest bank and insurance group.

The move was aimed at staving off a total collapse following heavy losses on the bank's €9 bn property finance division. In total, the Dutch government has committed well over €11 bn through a package involving a capital injection, writedowns, loans and guarantees.

The bailout means the Dutch budget deficit will grow this year by an extra 0.6% while the national debt will increase by 1.6%. There is no doubt that this will cast a shadow over Dijjselbloem's new role within the Eurogroup where his main task is to rein in government spending within the 17 countries that make up the Eurozone. At home, Dutch politicians and commentators have been scathing of the string of events that has turned the Netherlands into 'Cuba on the North Sea'.

Dijsselbloem faces equally tough questioning abroad on how the Netherlands has lost its stature as a paragon of budgetary and fiscal discipline.

The nationalisation of SNS Reaal painfully reveals serious omissions in the Dutch Central Bank’s supervision of the domestic banking sector. The state rescue follows an attempt by private equity firm CVC Capital Partners to take over SNS and has forced the Dutch finance ministry to provide details about the events leading up to its intervention. One of the most disturbing facts that was been laid bare in recent days is that the Dutch Central Bank apparently failed to spot €2 bn in real estate risks.

In its annual report for 2011, SNS Reaal provides what now can only be described as a rose-tinted picture of the value and risks of its €9 bn property financing portfolio minus a €0.7 bn provision. For 2012, the bank estimated it would need to take an additional provision for writedowns of between €1.4 bn and €2.1 bn. This is significantly lower than estimates from Cushman & Wakefield commissioned by the Dutch government in October last year. According to the adviser, the portfolio faces total writedowns of €3.4 bn to €4.1 bn.

The figures are based on the real economic value of SNS PF’s loan portfolio, which the adviser says is around €5.6 bn at best and €4.9 bn in a worst-case scenario. Based on a €9 bn portfolio, this represents writedowns of nearly 40% to well over 50%.

These estimates have not been plucked out of thin air. They are based on transactions that PropertyEU and its Dutch sister publication PropertyNL have been systematically publishing these past 24 months. They are also in line with other leading valuers in the Netherlands such as CBRE.

That’s not the whole story either: in its books, SNS put the value of its own real estate at €512 mln. But according to Cushman & Wakefield the real value is much lower at between €185 mln and €265 mln. Altogether Dijsselbloem is forced to conclude that the losses are 'significantly' higher than the estimates made by SNS Property Finance.

That is a polite way of saying that the bank has been building castles in the air with the support of the Dutch banking sector watchdog. It is not a good sign that the Dutch Central Bank is not aware of such differences on a €9 bn portfolio. At the very least, it would seem that it hasn't done its best to find suitable reference transactions.

SNS and the Dutch Central Bank may well counter that the market doesn't have the answer either as a market price has not been established for the portfolio. There were buyers in the market like CVC Capital, but the guarantees they demanded were so high that the minister decided to opt for nationalisation. An understandable decision given that the government would have had to foot the bill in any case and would otherwise have been left with very little say on the matter.

The nationalisation of SNS Reaal brings back a measure of rest to the market. The lack of real estate expertise at SNS Reaal and fears for a bank run had been weighing on the Dutch market throughout 2012. SNS Real had become fair game in real estate negotiations precisely when staying power was needed.

In autumn last year, PropertyNL called for a bad bank to be created as soon as possible, but the Dutch Central Bank failed to act speedily. After years of uncertainty, nationalisation creates the necessary respite to reorganise the portfolio in a sensible manner.