Visiting Rabobank CFO criticises European politicians slow sovereign debt crisis response; Sees PIIGS debt haircuts as likely

By Gareth Vaughan

The European Union's politicians ought to at least double their 750 billion euros rescue package for the continent's sovereign debt crisis or draw a line in the sand, conclude some countries are in default, and force haircuts on the financial institutions and investors holding their toxic debt, says Rabobank's global chief executive officer (CFO).

Bert Bruggink, Rabobank global CFO, or CFO of Rabobank Nederland's executive board, told interest.co.nz that after the events of the past few years he was getting used to operating amid a crisis in the world's financial markets.

"It’s clear the situation in Europe at this moment in time is not that good and there are some similarities with what we are seeing right now in the financial markets to what we had experienced back in 2008 in the Lehman (Brothers) period," Bruggink, in New Zealand to meet with investors this week, said.

That said, he said Europe was currently experiencing more of a political crisis than a financial crisis, and one which the politicians aren't doing a good job of resolving.

"The politicians in Europe have been discussing how to deal with Greece from May 2010 onwards and all the decisions they have made so far are basically too little and too late," he said.

"Things have been deteriorating quite a bit over the past two months and the way it’s being treated by politicians in Brussels is simply not good enough and not strong enough."

Two options on the table; A monster bail out or haircuts

Bruggink said he believes the politicians basically have two options.

Firstly, they could send a very clear signal to the financial markets via "a wall of cash" by increasing the 750 billion euro rescue package to 1.5 trillion euros, or even more, so they can deal with any pressure on Greece, Portugal and Ireland and potentially Italy and Spain.

"And the other alternative, maybe a very extreme one but one you have to think about, is that Europe is very explicit in stating there is some line in the sand which they don’t want to pass," Bruggink said.

"And that regarding Greece and Portugal, and maybe also Ireland, we have to conclude that these countries are in default and they have to haircut their debt significantly and that basically is the price the financial institutions, the investors, have to take."

The biggest concern was that the public debt of some of these countries is beyond what they can service both now and in the future.

"So ultimately something has to be done regarding the restructuring of public debt of these countries. One way of doing that is by letting them go into default," Bruggink added.

His "slight preference" is for the first option.

"But apparently politicians have difficulties in reaching a conclusion like that. (So) then I think the second option is the only alternative that ultimately is going to happen."

Rabobank's PIIGS exposure 'tiny'

The co-operatively owned Rabobank which has the highest possible credit rating of AAA from Standard & Poor's, has "tiny"combined exposure to Portugal, Ireland, Italy, Greece and Spain (the so-called PIIGS nations), Bruggink said.

"The exposure we have on these countries at this moment in time is just over US$400 million. On Greece we currently have exposure of US$111 million and most of it has been provided for," said Bruggink.

"We basically have followed market prices which are somewhere around 50 cents in the euro. That’s the basis for us to value these bonds at the moment."

Rabobank's recent half-year results delivered a 13% rise in net profit to 1.9 billion euros. The group has assets of 269 billion euros.

Of New Zealand, Bruggink acknowledged Rabobank had been lending more money to the rural sector than other banks and intended to continue doing so. From an exports perspective, the local agriculture sector was performing strongly.

"Dairy, beef, etc is doing extremely well," Bruggink said. "The only sector facing a little bit of trouble still is the winery sector but all in all it (New Zealand) looks all very attractive and far away from the problems Europe is facing right now and the US is facing with public debt."

Rabobank, which raised NZ$900 million in a September 2007 debt issue which is still New Zealand's largest ever non-government debt issue, has raised NZ$750 million from within New Zealand so far this year and a further NZ$750 million overseas with the bulk of this used to fund the local New Zealand operations.

"Both numbers are the highest we’ve ever experienced so I don’t think we should say that number is going to increase dramatically. I would be very pleased if we were able to continue similar amounts for the years to come," Bruggink said.

Meanwhile back in Europe, Rabobank was benefiting from the turbulent times by being seen as a safe haven for investors. The bank had taken in billions of euros worth of money from both retail depositors and institutional investors in recent months who were looking for safety.

Bruggink said Rabobank's funding costs were being forced higher in the sense that its bond spreads had been widening  by 10, 15, or 20 basis points. But that said, European peer banks had seen bond spreads widen by hundreds of basis points.

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