Corona crisis: the risks of sureties and loans to public finances
The State of the Netherlands has provided sureties and loans to an amount of €62.7 billion in recent months to cushion the economic consequences of the corona crisis. Ministers have not always kept to the rules introduced several years ago for such risk schemes. The rules were tightened up following the credit crisis in 2008 and subsequent years in order to prevent the State facing excessive financial risks (“no, unless”). An audit report entitled Corona crisis: the risks of sureties and loans to public finances and published by the Netherlands Court of Audit on 25 November 2020 concludes, however, that the rules on this form of support are not always being applied consistently.
Between March and the end of August 2020, the State of the Netherlands introduced 14 surety schemes, chiefly to support businesses and the care sector. In doing so, it increased its financial exposure by €60.9 billion in 5 months. This figure does not include the surety provided to the National Consortium for Medical Devices to cover potential losses due to the higher cost of medical devices as a result of the corona crisis. The financial importance of this scheme is not known.
Outstanding sureties rise to nearly €250 billion again
The financial exposure due to the sureties provided or extended during the corona crisis is nearly as high as it was at the peak of the credit crisis. The support provided to companies included the reinsurance of letters of credit, sureties for small and medium-sized enterprises, for KLM and hospital pharmacies and a raft of EU support measures. Standing surety has no direct consequences for public spending but there is a risk that the government will have to pay out if the surety is invoked.
Loans for various purposes
Besides the sureties, ministers awarded loans to an amount of €1.8 billion during the corona crisis (8 during the period audited). Loans were granted, for instance, to Aruba, Curaçao and St Maarten, the SGR travel insurance fund, KLM and the Wadden Sea ferry services. The government is running a risk that the loans will not be repaid in full and it will not receive the associated interest income.
Limited use of assessment framework
In 6 of the 22 schemes, ministers did not use the obligatory assessment framework to determine whether a loan or surety was appropriate. In other cases the assessment framework was not always completed in full. In 4 cases ministers submitted the completed framework to parliament after the House of Representatives had already voted on the necessary budget amendment. In one case the government did not inform parliament that a risk scheme was already in place before the House and the Senate could vote on it.
What are our recommendations?
The Netherlands Court of Audit recommends that the rules be evaluated so that the government and parliament can decide whether specific rules for risks schemes are necessary during a crisis. It cannot be said at present how much the government will lose on the sureties and loans it has provided. The government is provisionally estimating the loss at €2.6 billion. The Court of Audit recommends that the government inform parliament every year of projected and actual losses incurred.
What methods did we use in our audit?
We analysed public sources to identify the risk schemes the government has introduced or extended. We then determined, again from public information, the financial importance of each scheme and what was known about expected losses. We also analysed the policy framework for the schemes and the assessment framework. Information submitted by ministers to parliament was also analysed.
Why did we investigate sureties and loans?
The government has made full use of risk schemes during the corona crisis. The government’s financial exposure has accordingly increased substantially. Our audit considered whether parliament had been informed in full and on a timely basis.
In response, the Minister of Finance said the rules would be evaluated and the assessment framework would in future be applied more conscientiously. The minister acknowledged that parliament should always be informed in full with a view to its right to approve the budget and it should have an opportunity to express an opinion on proposed policy. The Court of Audit finds it strange that the minister underplays the cost effectiveness of the schemes because they support the economy. Supporting the economy is always the objective of the State’s risk schemes. The minister’s written response was published on the Court of Audit’s website at the same time as the audit report on 25 November 2020.