Dutch debt costs creep higher

Dutch long-term borrowing costs crept up at a bond sale today after the government collapsed in a crisis over budget cuts but there was good demand from investors attracted by its top-notch credit rating.

Prime minister Mark Rutte tendered his government's resignation yesterday after a dispute with the populist Freedom Party over spending cuts that are needed to meet stringent European Union budget limits.

The Netherlands has been one of the euro zone's most stable members but has now joined others facing political trouble as a result of government efforts to drive through austerity and streamline finances.

The crisis has created a political vacuum, worrying financial markets and the Moody's rating agency.

But investors focused on the Netherlands triple-A credit rating, a rarity in Europe, and economic fundamentals such as a trade surplus, relatively low debt and unemployment.

"The longer-dated bond is a bit of a soft result but by no means a disaster given we've seen the biggest upheaval ahead of a Dutch bond sale for many years," said Lyn Graham-Taylor, rate strategist at Rabobank in London.

The debt agency sold nearly €2 billion of two- and 25-year government bonds. The cost of issuing the longer bond was 8 basis points higher than the closing price in the secondary market on Friday, before the crisis blew up.

But the 2014 bond was broadly in line with Friday trading and the size of the sale was in the middle of the government's target range which is normal for a Dutch bond sale.

The spread on Dutch 10-year bonds compared with the German equivalent fell today, encouraged by the sale.

Mr Rutte will appear before parliament later today for a debate on how to proceed with austerity measures and the timing of the elections.

It is unclear how soon they could take place. Some politicians are pushing for an early election, perhaps as soon as June, to end the political uncertainty while others have suggested that the earliest date possible is in September.

Geert Wilder's Freedom Party had backed Mr Rutte for the past 18 months and the split with him over budget policies provoked the government's collapse.

The government had taken a tough line with euro zone "budget sinners" such as Greece and had been seen as a haven of stability among euro zone members.

But 10-year spreads over safe-haven German bunds reached their widest in three years yesterday after the government collapse before rallying today.

Moody's ratings agency said yesterday the government's collapse was a negative factor for the country's credit but maintained its Aaa rating with a stable outlook.

But it said if the country weakened its commitment to fiscal discipline, the rating could face downward pressure.

"This development is clearly credit-negative for the Dutch sovereign given that it generates both political and policy uncertainty," Moody's analysts wrote.

"Having said that, the Netherlands is entering this testing period from a position of relative strength."

Reuters