* Nationalisation to cost an initial 3.7 bln euros
* Seen pushing budget deficit further above target
* SNS Reaal hit by soured property assets, management quits
* Shareholder group says may challenge nationalisation (Adds prime minister's comment, rating agencies)
By Thomas Escritt and Anthony Deutsch
THE HAGUE/AMSTERDAM, Feb 1 (Reuters) - The Netherlands has nationalised bank and insurance group SNS Reaal in a $14 billion rescue that highlights the fragility of European banks and the continued exposure of taxpayers five years after the financial crisis erupted.
The Dutch government said on Friday it had put together the 10-billion-euro package - which follows a much smaller bailout in 2008 - to prevent SNS Reaal's collapse under the weight of property loan losses and to shore up confidence in the financial system after a private investor-led rescue failed.
The move shows how, despite billions of euros of bailouts and regulators' attempts to clean up the industry, some European banks are struggling to recover from the financial crisis in a persistently weak economy, and how the region's debt-laden governments - and in turn taxpayers - remain on the hook.
That is likely to prompt an outcry from a Dutch public which has already suffered years of austerity, including a cumulative 30 billion euros of budget cuts announced in the past year.
"The bankers get more and more money, and the people at the bottom foot the bill," said Jan-Erik Lubbers, a pensioner, as he sheltered from the rain under a shop awning in The Hague.
The rescue will lead to a worsening in the Dutch budget deficit in 2013, already forecast to exceed European Union targets. That will be a challenge for Prime Minister Mark Rutte, who was re-elected in September, and embarrassing for his new finance minister, Jeroen Dijsselbloem, who only last month took over as head of the Eurogroup of euro zone countries, which are trying to put a sovereign debt crisis behind them.
"Without a doubt this is a serious setback for the state budget," Rutte said in his weekly televised press briefing.
"This is obviously going to come out of the pockets of taxpayers. We would all have preferred to spend it on other things."
Several other European banks are also struggling to free themselves from underperforming assets. French bank Credit Agricole announced over $5 billion of charges on Friday, a day after Deutsche Bank also unveiled big writedowns.
The Dutch government paid out nearly 40 billion euros to rescue the domestic financial sector in 2008 when it provided capital injections for ING, Aegon and SNS Reaal, as well as nationalising ABN AMRO.
They have either repaid state funds or are getting back on their feet. SNS Reaal "seemed to be the most vulnerable" because of its big property exposure, said Jan Maarten Slagter, a director of the Dutch Association of Shareholders (VEB).
"A big part of the Dutch bank industry is already in state hands," he said when asked whether he expected any other Dutch banks to require aid: "This should be it."
Despite its previous bailout, SNS Reaal, the fourth-biggest financial group in the Netherlands, has struggled to turn around its property finance arm. Over years it expanded aggressively into all areas of property financing, from Spanish golf resorts to Dutch commercial and residential projects, and U.S. real estate. With the downturn in property prices came big losses.
SNS Reaal, with 2.6 million account holders and 36.4 billion euros of deposits, has tried to sell assets and raise funds for months, but was unable to meet a Jan. 31 deadline to come up with a rescue, Dijsselbloem told a press conference.
Its collapse "would have unacceptably large and undesirable consequences for financial stability, the Dutch economy and the Dutch tax payer," he said in a letter to parliament.
The Netherlands used a new law known as the intervention act to expropriate SNS Reaal's shares, subordinated debt and some hybrid securities, but not senior debt and covered bonds.
BNP Paribas' investment funds ranked among the top owners of the shares. The fund manager was not immediately available for comment.
The Dutch Association of Shareholders is considering whether to challenge the nationalisation, Slagter said.
"This wasn't really a liquidity crisis, there was no bank run ... it was all about the revaluation of the property which we already knew was a problem."
He said the association also wanted an investigation launched into possible mismanagement at the group.
Last month, SNS Reaal said former clients of its property finance arm were being investigated by the country's tax and financial crimes agency, but gave no details.
"I don't think there will be an extra investigation," Dijsselbloem told Reuters later on Friday, adding it was already clear what the problems were.
SHARING THE BURDEN
Dijsselbloem put the initial cost of nationalisation at 3.7 billion euros, saying SNS Reaal will receive a capital injection of 2.2 billion euros, and a further 1.5 billion euros to write down state aid and property assets. The state is providing 1.1 billion euros in loans, and 5 billion euros in guarantees.
However, in an effort to share the burden with the private sector, Dijsselbloem said Dutch banks will have to contribute 1 billion euros to the rescue in 2014.
"I can understand the reluctance that many will feel again because a large amount of public money is required. Therefore I want the private sector to contribute as much as possible to help pay for the rescue of SNS Reaal," he said.
The cost was to be roughly split between the country's three largest financial groups, ING, ABN Amro and Rabobank.
The Dutch budget deficit is forecast to reach 3.3 percent of gross domestic output in 2013, above the 3 percent limit set by the European Commission, according to government agency CPB which is due to publish revised forecasts in the next few weeks.
The finance minister said the 3.7-billion-euro of initial aid would lead to a further deterioration in the deficit of 0.6 percentage points, but declined to say whether this would necessitate further austerity measures.
Rutte's new coalition government was forced to come up with about 16 billion euros of budget cuts soon after the election last September and quickly fell in the opinion polls.
Richard McGuire, strategist at Rabobank, said he did not expect the rescue of SNS Reaal and resulting impact on the deficit to hurt the Netherlands' triple-A credit rating because the government had raised much more than expected in its auction of fourth generation (4G) wireless frequencies last year.
But ratings agencies said they were already looking at the implications for the Netherlands.
SNS Reaal, which received 750 million euros of state aid in 2008, said its top executives - chairman Rob Zwartendijk, chief executive Ronald Latenstein and finance chief Ference Lamp - had resigned, as they had wanted to find a private sector solution.
Gerard van Olphen, an executive from insurance group Achmea, was appointed chief executive, and Maurice Oostendorp, a former executive from ABN Amro, stepped in as chief financial officer.
The Dutch property market is one of the worst performing in Europe, having fallen by more than 16 percent since 2008. Prices are expected to continue declining this year, wiping as much as a quarter off prices since the peak.
SNS Reaal's property finance unit had total real estate exposure of nearly 14 billion euros at the end of 2009, according to its annual report. By June 2012, the book value of the property portfolio stood at 8.55 billion euros, the finance ministry said, with roughly 77 percent in the Netherlands.
($1 = 0.7367 euros) (Writing by Sara Webb; Editing by Hans-Juergen Peters, Mark Potter and Sophie Walker)