AMSTERDAM: The Dutch central bank on Friday said the state must use reforms and spending cuts to reduce its budget deficit, and warned of the risk of rising interest rate costs and a rising debt level due to credit guarantees.
"If the Netherlands does not bring its government finances back in order, there is an increased risk that financial markets will enforce this by demanding a higher interest rate, as has happened elsewhere in the euro zone," the Dutch central bank said in a statement.
The Dutch budget deficit will stay above European limits until 2015 unless there are extra spending cuts, and the Dutch economy, which has been in recession since July, will continue to shrink this year, according to official forecasts released on Thursday.
The open Dutch economy is suffering from several setbacks, including a 10 percent slump in house prices from a 2008 peak, slowing export growth due to the euro zone debt crisis, and lower pensions due to capital shortfalls. Consumer confidence is at a nine-year low.
The European Commission expects the Dutch economy to show the fifth-largest contraction in the euro zone this year, by 0.9 percent, just after Greece, Portugal, Italy, and Spain.
The Netherlands needs structural reforms and budget cuts to reduce the state deficit, which is expected to reach 4.5 percent of gross domestic product this year, the central bank said. This is above the European Union limit of 3 percent.
State debt might rise further because of guarantees to Dutch housing funds and the euro zone rescue fund European Financial Stability Facility (EFSF), the central bank said. The guarantees equal almost 80 percent of Dutch GDP, it said.
"If these guarantees are called on, it will lead to a rise of the debt ratio. For this reason, too, reorganisation of government finances cannot bear further delays," the central bank said.
Dutch state debt, which is already above the EU limit of 60 percent of GDP, will rise to 75.8 percent of GDP from 69.7 percent this year, Dutch economic think tank CPB said on Thursday.
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