THE Dutch were not terribly surprised this morning when Standard & Poor's, a rating agency, downgraded their country’s credit rating from AAA to AA+. The loss of status felt rather like the latest chapter in a years-long fall from grace of a country that was once among Europe's elite northern economies as it stumbled into a morass of recession and budget deficits. The chief culprit, everyone agrees, is a massive housing bubble early in the last decade that has left the Dutch with the highest household-debt levels in the euro zone, and has crushed consumer confidence since prices began falling in 2008. But, increasingly, Dutch economists are also blaming the austerity measures the government began implementing in late 2010 in an effort to reach the EU's 3% budget deficit limits, a goal that seems to recede ever further, even as the cuts continue.

The S&P report does not address the thorny question of whether austerity has ultimately had a perverse effect. Rather, the ratings agency says it has had to lower its assessment of the Netherlands' underlying rate of growth, because that rate seems to have fallen far behind those of high-income peers such as Germany. The Dutch export economy has actually been doing quite well, growing over 2% over the past year; the country's current account surplus is approaching an all-time high of 10%. But the domestic consumer economy has been miserable, with the volume of household consumption falling in every quarter since the beginning of 2011.

The underlying factor is housing debt: total Dutch household debt amounts to 110% of GDP. With housing prices down 20% since 2008, people have cut back on large purchases in order to pay down their debt loads. Sixteen per cent of Dutch households are underwater, owing more on their mortgages than their houses are worth. Unemployment is now up to 7% and is likely to hit 8% (according to EU forecasts). GDP has shrunk 3.5% since 2008 ; S&P predicts it will take until 2017 for it to regain its earlier level, and sees growth next year at 0.5%, the same as the Netherlands' official forecasting authority. Others are even more pessimistic.

S&P thinks the economy's strengths, including a huge pension system and a net foreign asset surplus of 50% of GDP, still make Dutch government debt a very safe bet. Markets had the same reaction: the yield on ten-year Dutch bonds barely budged from its current level of 2.02%, though they are no longer quite in the same class as Germany's. Jeroen Dijsselbloem, the Dutch finance minister, said he took the S&P report as validating his government's policies, noting that the report "emphasises the importance of budget discipline and reducing the state debt."

That line would certainly have been what one might have expected to hear from the Dutch back in 2011. In the days when their unemployment level was below 5% and the country's economy was among Europe's strongest, they championed tough Europe-wide enforcement of deficit limits and austerity. But over the past two years, they have gone from being the model to being the problem child of core European economies. A parade of Dutch economists responded to the S&P downgrade by cautioning the government to back off from its relentless attempts to meet the 3% deficit limit.

Most recently, the cabinet pushed through a new round of €6 billion ($8 billion) of expenditures cuts for 2014; those cuts will hurt growth, yet the government still expects the deficit to come in at 3.4% of GDP. Sylvester Eijffinger, an economist at Tilburg University, warned that the government risked getting caught in a "dead-end" cycle of cuts, with each new round further undermining consumer confidence and further worsening the domestic economy. The underlying problem, the economists agreed, is that the two parties in the Dutch government, the centre-right Liberals of Mark Rutte, the prime minister, and Mr Dijsselbloem's centre-left Labour party, are at odds over fundamental reforms to the housing, labour, and health-care markets. Until that changes, the Dutch economy is likely to continue to limp along. Adding insult to injury, S&P writes that if the economy worsens unexpectedly, another downgrade could be on the cards.