UPDATE 1-Dutch economy positioned for global recovery -ECB's Knot

Thu Mar 13, 2014 9:22am EDT

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By Thomas Escritt and Harro Ten Wolde

AMSTERDAM, March 13 (Reuters) - The Dutch economy is positioned to take advantage of a "worldwide upswing" but financing for the small and medium sized companies that drive growth remains a concern, central bank governor Klaas Knot said on Thursday.

Unveiling the central bank's annual report, Knot said he hoped alternative sources of financing would take a greater role in funding the Dutch economy, easing firms' dependence on banks.

"A lack of demand for credit is one part of this (financing shortage) ... but there is a need for more risk-bearing capital for SMEs," said Knot.

The bank's annual report suggested both venture capital and "crowd funding from the general public" could help finance small businesses, as could the country's giant pension funds.

The Dutch economy has returned to growth after a prolonged period of sluggishness following the global financial crisis, exacerbated by budget cuts and falling house prices.

Last week, the government forecast an expansion of 0.75 percent this year and growth of 1.25 percent in 2015.

Knot said that, with the crisis receding, it was time for the Netherlands to consider returning to a "trend-based" budgetary policy focused on conservative estimates of future income, known as the Zalm norm after a former finance minister.

The Netherlands was forced to abandon this approach, which had governed its budgetary affairs since the mid-1990s, when its budget deficit breached the European Union's 3 percent limit following the crisis.

The governing coalition has taken political flak for pursuing tight fiscal discipline in order to bring the deficit below the EU ceiling.

The central bank was cautious about proposals to raise bank capital ratios, warning that attempting to strengthen lenders by raising capital ratios to 5 percent rather than the 4 percent currently envisaged risked sucking billions out of the economy.

"Investors are not eager to invest in banks at the moment," director of banking supervision Jan Sijbrand said, adding that raising the amount of capital banks must hold to cover potential losses would almost certainly lead them to cut lending.

Knot, a member of the European Central Bank's governing council, said he saw little need for further unconventional monetary policy measures in the euro zone as stability returns to the bloc, although he repeated that he would be in favour of dropping interest rates to below zero if needed.

He saw deflation risks as limited, saying: "I don't think it (deflation) will get out of hand."

"If that changed we would need to look again at whether we should do anything on monetary stance, the interest rate, or something about the monetary transmission process," Knot added. "We have deployed instruments in both directions before."

In its report, the Dutch central bank said the biggest challenge for euro zone members was to stick with structural reforms, in particular freeing up labour markets, which would raise trend growth rates.

The bank also said euro zone monetary authorities would need to move away from existing unconventional monetary policies - such as ultra-cheap funding for banks - while avoiding negative side-effects from their withdrawal. (Reporting by Thomas Escritt and Harro ten Wolde; Editing by Catherine Evans)

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