Across the world, governments are doing their level best to shore up weak banking systems in the wake of the most significant final crisis in decades.  Most market players appear to believe these efforts successful; why else have shares risen so dramatically from lows late last year and early this year?

While I do believe the efforts have indeed been successful, I am far from certain they have addressed the underlying problem: large quantities of unrecoverable debt from reckless lending.

Witness the most recent bank merger in Scandinavia between Nordea and Fionia Bank.   This event seems to have gone largely unnoticed outside of Scandinavia. But, the core issues of socialization of losses, zombie financial institutions, unrealized loan losses, and too big to fail institutions are the same ones at work in the U.S., the U.K., Switzerland, France, the Netherlands, and many other countries.

While all is fine and good in an environment of economic recovery and rising asset prices, there remains a lot of downside risk were we to face a renewed slump in the global economy.

Socialization of losses

Fionia is a failed bank in Denmark about which I wrote in February. The bank collapsed after taking large writedowns early this year.  However, the Danish government was loath to liquidate the institution. Instead, it transferred the assets of the bank to a new Fionia Bank, which it has just sold on to Nordea, the large Scandinavian giant.

You should notice two things about this transaction. First, the price is quite low: Nordea has acquired Fionia for $173 million. This pales in comparison to the well over $200 million writedowns Fionia took which caused it to fail.  Moreover, the Danish government subsequently pumped another $169 million into the bank in order to sanitize it for sale.

I have not seen any details of the sale in regards to further contingent liabilities for the Danish taxpayer. But, to my mind it strikes me as similar to recent FDIC seizure/sale agreements for BankUnited and Guaranty, where the government took the lion’s share of losses and flogged the remaining assets off for a low price to a willing buyer.

Zombie financial institutions

But, then you have the zombie bank problem. The term ‘Zombie Bank’ was popularized during the S&L crisis by Edward Kane to connote banks which continued to operate but only as a result of government largesse as they were effectively insolvent.

Nordea had a very fine second quarter in which it showed net income of over 600 Million Euros. The Danish daily Berlingske Tidene even called the first half “one of the best in Nordea’s history.” But, how healthy is Nordea really?  It will weather the storm but the company has large residual exposure to unrealized losses in the Baltics.

More to the point, Sweden’s central bank, has lowered interest rates to effectively zero. This allows any financial institution in trouble to make a large gain due to interest-rate spreads (borrowing for much less than lending) or the carry trade (borrowing short and lending long). The Riksbank is actually running negative interest rates by charging banks to hold funds on deposit. Clearly, banks now have every incentive to lend and this will support the economy as long as rates remain low.

But, it’s not like those unrealized losses magically disappear.  The toxic assets are still there.  Asset price inflation makes them appear to become much less toxic.  But what happens when the economy in Sweden turns down or asset prices fall?

That’s when day turns to night and the zombie banks come out of their holes and terrorize the town.

Too big to fail

Flogging Fionia off on Nordea is a lot like having JPMorgan Chase buy Washington Mutual.  It only makes the acquiring company larger and more dangerous – too big to fail and too big to bail (out).  It is not a very good solution. Just ask Iceland.

By now you have seen David Cho’s piece in the Washington Post analysing this very problem in the United States.  He writes:

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

But this is not just an American problem. It is a systemic problem that affects Europe even more. Look at the list of the top twenty-five European banks by asset size. Almost every Western European country is plagued by the Icelandic problem of institutions that are too big to fail, but too big to rescue.

In fact, Denmark is near the top of my list with one institution, Danske Bank, having assets nearly 200% of GDP. Were I to have added Sweden to this list, they would come in ahead of Denmark with four banks having assets of over 300% of GDP. (Nordea – 2008 assets: 474 billion euros, SEB – 213 billion euros, Handelsbanken – 212 billion euros, and Swedbank – 179 billion euros.

Germany is taking the lead on putting an end to too big to fail – or at least solve this problem on a global basis. Peer Steinbrück, the German finance minister, is trying to force the G-20 to agree to “international rules that facilitate the insolvency and liquidation of large, internationally active banks.”

Concluding thoughts

Felix Salmon suggests a surcharge on bank size.  The idea is that taxing banks, penalizing them for becoming to large, one can use a more free-market approach to curb these institutions.  I like the idea, but I do think more will be necessary.  The bank size surcharge is one most banks would willingly pay if it means in good times they can pocket more excess profit in good times than the tax penalizes them.

And it is good times that are important. if the Federal Reserve and other central banks continue to lower interest rates to extremely low levels, banks will extend credit recklessly in good times because of a false price signal the interest rates display. Only when a downturn takes place will banks recognize they have over-lent and that the size surcharge was not a good bet.

I am sceptical that anything meaningful will come of Steinbrück’s plan in an environment were everyone is talking about economic recovery.  The urgency seems to have passed. But, the threat posed by toxic assets and by megabanks has not.

Note: Originally, this article stated that Nordea had ‘huge’ exposure in the Baltics.  This has now been changed to ‘large’ and I have added the line ‘It will weather the storm.’ I do believe that Nordea is the best-positioned of the large banks headquartered in Sweden.  They are the best bank to take on a Fionia Bank. However, I am using their acquisition of Fionia as a vehicle for a larger discussion about acquisitions like this to talk about too big to fail.

Related posts:

• Earnings results at Swedish banks show large writedowns in Baltics
• Denmark: Fionia Bank collapses
• The latest bubble warning: Swedish house prices
• Consumer credit down a massive 33% in Spain
• UK: Darling confirms government to break up too big to fail banks

This is the assessment of den Danske Bank as reported by Edward Hugh.  The last time I mentioned the Baltics was on May 12th in my post “A bearish view on Eastern Europe.”  I ended saying the Scandinavian banks’ exposure to the Baltics is just as worrying and should be the place to watch before we give a definitive all-clear.”  And that all-clear signal is far from coming.  In fact things seem to be reaching a critical state.

Here’s what den Danske Bank says:

The event risk has risen sharply in the Baltic markets and we advise utmost caution. Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.

We should be watching these developments in Scandinavia and the Baltics because things have a way of metastasising in this globalized economy. Read more at the link below.

Source

Danske Bank Warn On The Baltics – Edward Hugh

see also Devaluation Imminent in the Baltics? by Claus Vistesen (notice the allusions to Argentina, a comparison I made last July.

Related posts:

• Estonia and Latvia: headed for the rails
• Earnings results at Swedish banks show large writedowns in Baltics
• Are the Baltics the new Argentina?
• Roubini’s RGE Monitor: Threat of ‘Asia-Style Crisis’ in Eastern Europe
• Foreign investors dump Danske Bank

Denmark’s 11th largest bank, Fionia Bank, has collapsed after massive writedowns of 1.2 billion Danish kroner. However, the company will not face liquidation. According to Politiken, Instead of bankruptcy, Fionia’s assets will be transferred to a newly incorporated banking company.

In advertising campaigns, Fionia had dubbed itself the “bank of your future.” Despite the obvious, the bank’s chairman insists the future is still bright and all is well.

The Fionia Bank Board is in trouble and to avoid further problems has entered into an agreement with the national Financial Stability company.

The agreement means that the banking activities in the current Fionia Bank are to be transferred to a new company which has been established and owned by Fionia Bank, but which is controlled by Financial Stability.

“The agreement requires approval of the Financial Supervisory Authority, the EU and competition authorities. At its annual general meeting on 10 March 2009 the Board will explain the contents of the agreement. There are proposals to change the name of the current bank to Fionia Bank Holding A/S and give the new company the name Fionia Bank A/S,” the company says in a news release.

The bank’s board and management will continue in the new company. Jørn Kristian Jensen, a former member of the Executive Board of Nordea, has been proposed to the board.

“This is not a liquidation but a strengthening of our ability to operate the bank,” says Fionia Bank CEO Jørgen Bast.

“The solution reached with the Financial Stability means that the bank’s shareholders for a period lose control of the company, but retain ownership. The control can be retained after the agreement, if the bank succeeds in creating enough positive results to return and repay the capital,” Bast says.

In the pledge period, voting rights are transferred to Financial Stability.

Annual accounts
Fionia Bank is to release its 2008 annual accounts on Tuesday. The Executive Board says that preliminary key figures are in line with previous forecasts, including depreciaition of DKK 1,218 million.

“The bank has a satisfactory core earning at 348 million. The Bank’s profit before tax shows a deficit of 960 million, and the bank’s solvency is before the agreed strengthening of the capital base 8.3 per cent of which the core capital is 4.2 per cent,” the bank says.

It adds that after discussions with the Supervisory Authority, Fionia Bank set the bank’s needs above 8.3 percent.

“With the capital increase of approx. one billion DKK the solvency of the bank will be around 13 per cent,” the bank says.

This past summer I reported on Roskilde Bank, which was a harbinger of worse to come in Denmark, which suffered from a burst property bubble and fell into recession early in 2008. In addition to Roskilde, Danish authorities have also taken over EBH Bank.

Denmark has escaped attention during the recent crisis over Eastern European debt. Most of its banks are relatively small. Yet, it has significant exposure to the Baltics and is home to Danske Bank, an international behemoth, with assets twice the size of the Danish economy.

I suspect this is not the last we will hear about trouble in Denmark’s banks.

Sources
Fionia Bank board throws in towel – Politiken.dk
Fionia Bank kollapsede søndag aften – Berlingske Tidene

Related posts:

• Bankrupt Danish Bank Roskilde sold
• Denmark wants in on the Euro
• Denmark bails out Roskilde Bank
• Bankrupt Roskilde’s shareholders argue over what to do
• Foreign investors dump Danske Bank

This comes from the Danish daily Berlingske Tidene. It suggests that Citibank is cutting back all international lending. Citigroup has sold its German operations to a French bank and I understand they are cutting credit lines in the UK as well. In seeing all these stories together, one gets a full view of the kind of cutbacks now ongoing at troubled banks like Citigroup.

Update: 20 Feb 2009 1552EST: I have yet to see confirmation as to whether ‘cutting’ credit lines means reducing or stopping new credit availability. It is also unclear whether this is credit under the ‘quick and easy loan’ programme or under all Citibank activities. I will update the post accordingly when that information is available.

Citibank has stopped lending

- We are not offering loans at the moment because of the economic situation.
That is the message when you call to get a Citibank Denmark ‘quick and easy loan.’

The Bank has just closed itself for what banks are best: lending money. And it is still uncertain when Citibank will start lending money again, writes Ekstra Bladet Netsite, eb.dk.

Finn Ostrup who is a professor of Finance at Copenhagen Business School, believes that Citibank Denmark’s American owner, Citigroup, is about to go bankrupt.

“Citigroup would have gone bankrupt in December, unless they had been helped by the U.S. Government.

“They are still threatened with bankruptcy, and I think that is why they will not lend more money,” says Finn Ostrup to Ekstra Bladet.

For Danish Citibank customers bankruptcy could be a hard blow.

“If Citibank terminates loans, they might not be paid back right away,” says Finn Ostrup.

“If that happens, customers may try to obtain money elsewhere. But if Citibank does not have the option of canceling loans, customers will have no problems,” he says.

Ekstra Bladet tried all day to get a comment from the responsible representatives from Citibank, but failed.

Source
Citibank har stoppet udlån – Berlingske Tidene

Related posts:

• Citibank Belgium to pay ‘duped’ savers 128mn for bad Lehman deal
• Bankrupt Danish Bank Roskilde sold
• The Roskilde Bank problem
• Denmark bails out Roskilde Bank
• Chart of the Day: Citigroup

It is not just Eastern Europe and Switzerland where problems are popping up. This comes from the Berlingske Tidene, a Danish daily:

Foreigners dump Danske Bank

Danske Bank shares have crashed. Foreign investors are concerned about the Danish economy.

Growing distrust of the Danish economy have caused international investors to shed Danske Bank shares. Danske Bank shares have plummeted 14.6 percent in a week — in heavy trading. The decline is mainly due to a number of major foreign financial houses like Morgan Stanley, Credit Suisse and UBS having sent cascades of sell orders into the market, according to Bloomberg Financial Service, writes daily newspaper Børsen.

- The decline in the Danske Bank is very much a macro story. Investors look with concern to Ireland, Eastern Europe and increasingly also onto the Danish economy. Denmark is in the group of countries with relatively high risk in Europe because of falling house prices, high indebtedness and low savings, says Andreas Håkonsson of UBS.

Since Danske Bank’s shares peaked in February 2007, the shareholders have lost 162 billion. kr. – a negative return of approx. 85 per cent.

Source
Udlandet dumper Danske Bank – Berlingske Tidene

Related posts:

• Citibank has cut all lending in Denmark
• Denmark: Fionia Bank collapses
• Denmark gets on the deposit guarantee train: all aboard!
• Danish banking crisis the worst in Europe
• Event risk in the Baltics is critically high

Danish Prime Minister Fogh Rasmussen is preparing Denmark for admission to the Eurozone.  Despite my skepticism about the Euro as a currency, I would say that Denmark is a perfect candidate for entry.  The Danish economy is already very well harmonized with “core” Europe of France and Germany. Their business cycle, monetary policy, political economy, and per capita GDP are all similar to France and Germany.

Below is my translation of part of a German-language article from Financial Times Deutschland which discusses the upcoming referendum in Denmark for joining the Euro in which Fogh Rasmussen makes some interesting contrasts between Denmark and the UK.

The Danish Prime Minister Anders Fogh Rasmussen is moving aggressively toward an early referendum on Denmark’s accession to the Eurozone. The financial crisis demonstrates the problems of a small currency, says Rasmussen.

“I think it would stabilize the Danish economy in times of crisis, if we had the Euro. I have no doubt about that,” Rasmussen said in a newspaper interview. However he did not offer a specific timetable.

Unlike the much-discussed entry of Britain, the entry of Demnmark into the Eurozone would not be a burden on currency stability. The EU Commission has said that Denmark is currently the only country that could join the Euro in a very short period .

On Thursday, the Danish parliament began a debate about the euro, during which EU Monetary Affairs Commissioner Joaquin Almunia praised the benefits of the Euro. Unlike in 2000, when the Danes rejected the euro in a referendum, there prevails today in the major parties general agreement that candidacy is overdue. However, the Danish People’s Party DF, on which the liberal-conservative minority government is based, is EU-sceptical. The leftist Party SF rejects the single currency as well….

As a main argument for the Euro, Rasmussen points to the interest rate policy of the Danish central bank as compared to the ECB. “In order to stimulate the economy, currently the interest rates should be reduced, but in order to protect the currency, one is forced to raise interest rates. That’s a paradox,” Rasmussen told the newspaper “Politiken”. In recent months, Danish interest rates were significantly higher than in the euro zone — at times, the difference was 1.75 percent points. At present, it is about one percent.

The national currency, the Danish Krone, is already linked to the common currency. Compared to the British Pound or the Swedish Krona, it has not fallen as much in recent months. “My conclusion is that Denmark should be there at the heart of Europe. That’s were we belong,” said Rasmussen. “I believe that in the Danish population there is strong agreement.”

Other Eurozone members which are well-placed as members of the Euro include the Benelux countries and Austria.  Sweden is another country which would be an appropriate addition to the Eurozone.  On the other hand, poor macro fundamentals make Greece, Portugal and Italy a burden on the Eurozone.  Unsynchronized business cycles in Ireland, the UK and Spain make these three countries equally problematic for the Eurozone.

Ultimately, the Euro does have benefits for small countries. It reduces overhead from foreign exchange, it increases markets for financial assets and it protects against currency attacks. If any country outside the Eurozone is well-placed for entry, it is Denmark.  Anyone following developments in the European political economy should watch what happens here.  It will be instructive for future events elsewhere.

Note: I failed to mention that Denmark has rejected the Euro once and current opinion polls suggest they would do so again now despite the Prime Minister’s claims to the contrary.

Source
Dänemark mobilisiert für den Euro – Financial Times Deutschland

Related posts:

• Denmark out of recession
• Denmark gets on the deposit guarantee train: all aboard!
• Denmark: the latest victim of falling house prices
• The case against the Euro
• The Euro crisis is beginning

EU governments have woken up to the need to defend the banking system by guaranteeing all or some of their citizens’ bank deposits. After Germany, Ireland and Greece, Denmark is the latest to do so. And Denmark may also be the one country that needs to do so the most of the remaining EU holdouts.

UPDATE 6 OCT 2008 918 ET: I just found out that Austria followed Germany in Guaranteeing bank deposits (See story here). So, that makes Ireland, Greece, Germany, Austria and Denmark.

Just 12 days ago, the Danish daily Berlingske Tidene pointed out that the Danish Banking system is in dire straits.

Danish banking crisis the worst in Europe
The Danish crisis is quite different and much worse than what we see in the rest of Europe. That is the ruling from large megabank UBS and credit rating agency Moody’s.

And UBS predicts more bank failures this year, writes Børsen. The housing and property bubble is more pronounced than in the rest of Europe – except in Ireland. While banks in the countries around us suffer from the same difficult problems in providing liquidity, the Danish banks are hit doubly as the loan guarantees are eroding sharply.

Unlike elsewhere in Europe, where it is primarily a question of restoring confidence, there is real risk that the quality of Danish banks’ assets will fall yet further due to falls in the collateral for the loans in the coming months.

“Danish house prices rose enormously until autumn 2006, when the housing starts also peaked. The build out was so large, it was obvious that prices would fall drastically, and this is what we see now. It is not only a question of raising capital, but that the quality of the underlying assets – namely the prices of the properties – is falling,” Andreas Håkansson, who has covered the Danish banking for UBS for the last eight years, said to Børsen.

Chief analyst Janne Thomsen from Moody’s in London points out that the collapse of Roskilde has created cracks in the paint and exacerbated the situation.
-Berlingske Tidene

Let’s hope the move by the Danes will have a calming effect on the markets as we now seem to have started a trend with bank deposit guarantees to calm jittery depositor nerves. Note: this is a blanket guarantee unlike the partial guarantee offered by Angela Merkel’s government in Germany. It’s only a matter of time before other European states employ similar tactics to restore banking confidence.

Denmark will guarantee all bank deposits in a deal funded by the country’s commercial lenders to bolster financial stability in the Nordic country.Commercial lenders will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses, the Copenhagen-based Economy Ministry said in a statement on it’s Web site today.

“Had a solution not been found it would have had serious consequences for the country’s companies and citizens,” the ministry said in the statement. “The financial crisis has led to a freezing of the money market, making it extremely difficult for even healthy, well-run Danish banks to secure the necessary liquidity.”

The 35 billion kroner are equivalent to 2 percent of Denmark’s gross domestic product, and emphasis had been placed on reaching a deal that wasn’t paid by tax payers, the ministry said. The decision comes after the U.S. last week passed a bill to spend $700 billion on purchasing assets from troubled lenders, and as European leaders agreed on steps to limit the economic fallout of a deepening credit crisis.

“The financial crisis means that banks won’t lend to each other,” Finance Minister Lars Loekke Rasmussen said in the statement. “This is not linked to the fundamental economic situation in Denmark.”

The agreement can be extended should there be need for such a move, the ministry said. Before today’s deal, the ceiling on deposit guarantees had been set at 300,000 kroner.

-Bloomberg

Sources
Denmark Guarantees Deposits in $6.4 Billion Pact – Bloomberg
Dansk bankkrise den værste i Europa – Berlingske Tidene

Related posts:

• Danish banking crisis the worst in Europe
• German deposit guarantee sets up a German-British row
• Foreign investors dump Danske Bank
• Get ready for a rough day in the markets
• The Germans guarantee all savings deposits

The U.S. and the UK are not the only countries suffering from a housing bust and a credit crisis. Ireland and Spain have had massive busts as well and it is only a matter of time before we begin to see affects on the banking sector. And there are many other countries that have seen a sizable impact from the crisis. However, Denmark is the country where the credit crisis has hit hardest in Europe.

After their own housing bubble and bust, the Danish economy went into recession earlier this year, followed by the collapse of Roskilde bank. The article below, which I have translated from Danish, highlights the likelihood of further losses bankruptcies in the Danish banking sector.

This should serve as a reminder that the bubble unwind process outside the United States is still taking form.

Note: For more posts on Denmark and Roskilde, see the tagDenmark.

Danish banking crisis the worst in Europe
The Danish crisis is quite different and much worse than what we see in the rest of Europe. That is the ruling from large megabank UBS and credit rating agency Moody’s.

And UBS predicts more bank failures this year, writes Børsen. The housing and property bubble is more pronounced than in the rest of Europe – except in Ireland. While banks in the countries around us suffer from the same difficult problems in providing liquidity, the Danish banks are hit doubly as the loan guarantees are eroding sharply.

Unlike elsewhere in Europe, where it is primarily a question of restoring confidence, there is real risk that the quality of Danish banks’ assets will fall yet further due to falls in the collateral for the loans in the coming months.

“Danish house prices rose enormously until autumn 2006, when the housing starts also peaked. The build out was so large, it was obvious that prices would fall drastically, and this is what we see now. It is not only a question of raising capital, but that the quality of the underlying assets – namely the prices of the properties – is falling,” Andreas Håkansson, who has covered the Danish banking for UBS for the last eight years, said to Børsen.

Chief analyst Janne Thomsen from Moody’s in London points out that the collapse of Roskilde has created cracks in the paint and exacerbated the situation.

In Roskilde’s bankruptcy, the bailout plan involved a collective bailout consortium by 100 other financial institutions, in effect spreading the loss thinly across the entire banking system rather than leaving the Danish taxpayer on the hook for the whole enchilada. In return for their taking on the Roskilde as shareholders,the other institutions will likely get a central bank backstop against some further losses — a moral hazard in my estimation.

Moreover, some preferred and other debt from the legacy Roskilde is subordinated to the equity interests of the consortium and made worthless with limited recovery. Old equity has been wiped out. As international bondholders do have exposure to the Danish market, future bankruptcies will reverberate outside of Denmark.

Source
Dansk bankkrise den værste i Europa – Berlingske Tidene

Related posts:

• Bankrupt Danish Bank Roskilde sold
• The Roskilde Bank problem
• Denmark gets on the deposit guarantee train: all aboard!
• Denmark bails out Roskilde Bank
• Europe is next

The Danish economy has officially left recession, marking a growth rate of 0.6% for the second quarter of this year. In the midst of much doom and gloom for the eurozone, this is a positive development. More news expected.

See other posts marked with the tag Denmark.

This translation from El Pais is the best story I have found on this topic:

It was the first to enter and also seems to be the first to leave. The Danish economy has left the technical recession after two quarters as the Gross Domestic Product (GDP) grew by 0.6% between April and June this year, according to official figures released today.

This increase reverses the negative trend of the previous two quarters, leading to the entry into technical recession, the first detected in an EU country this year. GDP had fallen by 0.8% in the first quarter of 2008. The second part of the year was marked by moderate growth in domestic demand and a reduction of foreign trade.
-El Pais, 1 Sep 2008

Related posts:

• Denmark: the latest victim of falling house prices
• Denmark wants in on the Euro
• South Korea going gangbusters in contrast to UK
• Bankrupt Danish Bank Roskilde sold
• Denmark: Fionia Bank collapses

PIMCO, the brainchild of Bill Gross and now owned by the German insurance giant Allianz, is concerned enough about the bankruptcy of Roskilde Bank in Denmark to have sent the following e-mail out to its clients. I have put important parts in red not already highlighted in the text.

Note that the bailout plan involves a collective bailout consortium by 100 other financial institutions, in effect spreading the loss thinly across the entire banking system rather than leaving the Danish taxpayer on the hook for the whole enchilada. In return for their taking on the Roskilde as shareholders,the other institutions will likely get a central bank backstop against some further losses — a moral hazard in my estimation. Moreover, some preferred and other debt from the legacy Roskilde will be subordinated to the equity interests of the consortium and made worthless with limited recovery. Old equity has been wiped out.

Is this a possible solution other markets might try? There seem to be positives and negatives to this solution.

he Danish Central Bank announced yesterday that it will lead a rescue plan to bail out Roskilde Bank (Denmark’s 8^th largest lender). Back in July 2008, the Central Bank had already granted an emergency liquidity guarantee to Roskilde following larger than anticipated losses on the bank’s real estate exposure. This solution was temporary and was contingent on the sale of Roskilde. See our July 11^th note below for more background.

Since the provision of this emergency liquidity line in July, Roskilde has been unable to attract any offer and losses in its real estate portfolio rapidly escalated due to high single name concentrations to property developers. Based on the regulator’s and the auditor’s assessment, the bank has been declared insolvent and given until the end of August to rebuild its capital in line with regulatory requirements. In the absence of any access to new equity from public markets or an outside buyer, Roskilde had no other alternative but to accept the central bank’s bail out.

Under this plan, the Danish Central Bank alongside 100 Danish financial institutions has taken control of Roskilde. The consortium will buy all of Roskilde’s assets and transfer them in a newly created ‘new bank’ and will assume all debts and other liabilities at the exception of hybrid and UT2 debt. After all this, Roskilde will hand in its banking license and will no longer carry on any operations. The consortium will inject DKK4.5bn (€607m) of equity in the ‘new bank’ and assume DKK37.3bn of senior debt. In addition, we understand that the government is likely to pass a new law allowing a DKK12bn risk shield to protect the new bank’s shareholders, and absorb future losses at Roskilde.

Senior creditors have the choice between transferring their debt to the new bank or being redeemed at par immediately. The treatment of bondholders at the UT2 and preferred level will be dramatically different as these securities will remain in the ‘old bank’, which has already reported negative equity of DKK2.5bn and will no longer have assets. The old bank will have no funds to redeem the UT2 and preferred debt issues and coupons will be deferred. Whilst UT2 and pref holders will be entitled to some compensation upon a possible privatization and/or sale of the bank, these securities will effectively rank lower in priority than the equity holders of the new bank, leading to very limited hopes of recovery. This affects €335m of UT2 and pref securities. Needless to say that the old bank’s shareholders have been wiped out.

It is important to stress that, unlike other European and U.S. banks, Danish banks do not issue LT2 (sub debt) instruments, but dated UT2s. The key difference between LT2 and UT2 is that the UT2s can absorb losses and defer coupons. The unusual features of Danish sub debt at least partially explain the harsher regulatory treatment than what has been experienced by holders of Northern Rock and IKB at the sub debt level. If Roskilde had standard LT2 outstanding, our guess is that these securities would probably be transferred in the new bank, and therefore face meaningfully lower losses than the dated UT2s and preferreds.

Moody’s is the only agency rating Roskilde and has affirmed senior at A3 with outlook developing, and logically downgraded its sub and pref ratings to C. Note that there is no notching between UT2 and pref given expectations of a very limited recovery.

Whilst Roskilde is a small and atypical bank and the size of outstanding UT2 and prefs is limited at €335m, the regulatory response and decision to leave UT2 and pref holders take the hit alongside shareholders provides a new and negative precedent for pref and UT2 securities, and another positive precedent for senior bondholders.

Related posts
The Roskilde Bank problem
Bankrupt Danish Bank Roskilde sold
Bankrupt Roskilde’s shareholders argue over what to do
Denmark bails out Roskilde Bank

Related articles in English
Is Denmark’s Roskilde Bailout a Harbinger of Deals to Come?, Deal Book
Danish Central Bank to Take Control of Roskilde Bank, Bloomberg

Related articles in Danish
Aktionærgruppe kæmper videre, Berlingske Tidene
Andre banker i farezonen for kollaps, Berlingske Tidene
Bank-kollaps kan koste skatteydere dyrt, Berlingske Tidene

Related posts:

• Danish banking crisis the worst in Europe
• Bankrupt Danish Bank Roskilde sold
• The Roskilde Bank problem
• Denmark bails out Roskilde Bank
• Bankrupt Roskilde’s shareholders argue over what to do

Over the weekend the Danish Central Bank took over bankrupt Roskilde Bank, wiping out shareholders. Tiny Denmark has had a bankruptcy on its hands that is following the script of Northern Rock in the UK to a tee:

• After lending too much money to the wrong people, the government is forced to step in as no private lenders want to have anything to do with the situation. A few months later the losses have mounted.

Will the losses stop at Roskilde or Northern Rock? Probably not. The scenario portends ill for the European and American banking sector and the FT has a good read on why (I’ll have more to say on Denmark when I have more time — notice my highlighting in bold below).

“It is clear that most people don’t believe the financial crisis is over.” With those words the Federal Reserve’s annual confab in Jackson Hole came to a close, and another bank went under. What is noteworthy about the collapse of Denmark’s Roskilde Bank is that it did not fail because of subprime losses (it had almost none) or lack of liquidity (the bank had unlimited access to central bank funds), but due to dud real estate loans kept on its books. As this may be the next shoe to drop in the credit crunch, small Denmark is showing the way for the world.The country has a proven record as a path-breaker. In 1992, Denmark’s “No” vote to the Maastricht referendum helped throw Europe’s exchange rate mechanism into chaos. Now it has some of the world’s most over-valued homes: since 2004, house price inflation has exceeded even that in the US, UK or Spain. Its consumers are also among the most indebted, with household debt at three times disposable income. This borrowing splurge was fuelled by inappropriately low interest rates imported via the Danish currency’s peg to the euro. Now that the splurge has ended, property prices are crashing. Indeed, Denmark was the first European economy to enter recession.

Refreshingly, bank rescues the Viking way seem to mean no bailouts for shareholders. Having failed to find a private buyer, Denmark’s central bank will inject almost $1bn to keep Roskilde afloat, appoint new managers, and assume its debts and loan book. At some DKr40bn ($8bn) this is a fraction of the $30bn of Bear Stearns assets the Fed took onto its books, or the £20bn of Northern Rock mortgages assumed in the UK. But, given the size of the Danish economy, the bailout could also be proportionately higher. All this from a regional lender with only 26 branches, fewer than 100,000 customers, and top marks from ratings agencies only a year ago. We have been warned

-FT, Lex, 25 Aug 2008

This failure has a lot more significance than people might think. The Roskilde bankruptcy is the canary in the mineshaft for U.S. regionals with construction loan and commercial real estate exposure and for small Spanish banks about to lose their shirts over Spanish vacation home overbuilding.

In Denmark, this bankruptcy has been big news. It should be elsewhere for what it portends for the future. Expect more on this later.

For more posts on Denmark and Roskilde, see the label Denmark.

UPDATE: Other articles
Is Denmark’s Roskilde Bailout a Harbinger of Deals to Come? – DealBook
Danish central bank takes over ailing lender – IHT

Related posts:

• Bankrupt Danish Bank Roskilde sold
• Denmark bails out Roskilde Bank
• PIMCO message to clients on Roskilde
• Danish banking crisis the worst in Europe
• Bankrupt Roskilde’s shareholders argue over what to do

The bankrupt Danish Bank Roskilde received no bidders as the Central Bank of Denmark looked to unload the bank as quickly as possible. Roskilde got into trouble after the Danish economy turned own and loans it had made to home builders went sour. Eventually, Roskilde became the third large European institution to fail since the credit crisis began, joining IKB of Germany and Northern Rock of the UK. All three failures were directly related to the mortgage crisis.

After no lending institution, foreign or domestic came forward, the Danes were forced to settle for a partial sale to private lenders, keeping a rump stake themselves.

Source
Danish Central Bank, Grouping Acquire Roskilde Bank, Bloomberg

Related posts:

• Bankrupt Roskilde’s shareholders argue over what to do
• Denmark bails out Roskilde Bank
• The Roskilde Bank problem
• Danish banking crisis the worst in Europe
• PIMCO message to clients on Roskilde

As the first bubble economy to hit the skids and officially fall into recession, tiny Denmark deserves a mention. Statistics Denmark has released figures showing that house prices are falling in Denmark, which joins an ever-increasing group of countries that includes the UK, the US, Spain and Ireland.

My translation:

The statement shows a shows an annual decrease in prices of 1.9 percent for single-family houses. And, by comparison, Real Credit Council’s [figures show] house prices fell by only 0.4 percent in the first quarter.

For owner-occupied accomodations, prices fell in the first quarter 9.3 percent compared with a decline of 8.7 percent in the statistics from Realkreditrådet.

According to Jakob Kongsgaard Olsson, the figures will affect household spending and mood negatively, because the Danes have a lot of money [invested] in bricks, which are worth less and less.

Source
Boligsituation endnu mere dyster, Berlingske Tidene

Related posts:

• Denmark: the latest victim of falling house prices
• UK: House price fall moderates, prices still down 13.9% in year
• Nationwide: UK house prices down 14.6%
• UK house prices fall most in 15 years
• Nationwide: U.K. house prices down 17.6% in year to Februay

As you may recall, Roskilde Bank in Denmark was recently rescued by the Danish central bank as it fell prey to the recession in Denmark. However, shareholders there are still fighting to save the bank, pitting interested parties against one another.

My translation from the following article in the Danish Daily Berlingske Tidene demonstrates that the coming wave of bankruptcies for financial institutions are going to involve a lot of legal bills, man hours and stress. The bankruptcy of a major financial institution is far from simple.

It will pay for financial regulators to have a system ready to deal with common issues efficiently and to adhere to strict guidelines in order to move beyond crisis mode as quickly as possible. As in this case below, shareholders always want to keep from losing their money. But most banks will need to be liquidated or sold. Regulators need to set strict guidelines for determining when to sell, when to liquidate and when to negotiate.

Allowing shareholders to extract gains due primarily to the central bank’s liquidity unfairly benefits shareholders and sets up a moral hazard. This was a primary objection to JP Morgan’s $10 offer for Bear Stearns. The Roskilde Bank case demonstrates that U.S. regulators should consider setting up a Resolution Trust-style entity to deal with bank failures sooner rather than later.

My translation:
Shareholders of Roskilde Bank want to cooperate

Laurits Harmer Lassen, Friday, 15. august 2008, 05:00

Several different shareholder groups in Roskilde Bank are fighting to save the bank, but the groups’ strategy are widely different. Now, shareholder groups want to find out how they can cooperate. One group is fighting to avoid the sale of Roskilde Bank altogether.

Same goal, different strategies. Two different shareholder groups are currently trying to salvage the value of Roskilde Bank. One group is open to a complete or partial sale of the bank, while the other group is fighting to preserve Roskilde Bank in their own hands.

Now, the two groups want to find out how they can cooperate, says Henrik Langkilde, who is spokesman for the shareholders, who are fighting to avoid a sale of the bank.

“From the beginning, we each have had our own way in the fight to save the bank, but we have continually been in contact. Now we shall meet soon and set joint candidates for the new Board of Roskilde Bank,” he says.

Henrik Langkilde imagines that one should set out the healthy part of the bank into an independent company, which through new capital will continue to run on its own. The plan is for a large number of shareholders to contribute an additional 500 million kroner [$100 million] into the new company, while a further 500 million will be transferred from the old Roskilde Bank.

In this way, all current shareholders will automatically be shareholders in the new company. The rest of the bank should be phased out as soon as possible in a sort of garbage rump company, where the shareholders have to take any hidden losses.

The others want to sell.

The second group, the one most discussed in the media, are more open to continuing the sale process of Roskilde Bank, which the management has launched. The group’s purpose, first and foremost, has been to change the bank’s board, adding new competent people who are not responsible for the bank’s crisis. The group recently succeeded in pressing board reform and the resignation of a board member, as there will shortly be an extraordinary general meeting. Here, the Group will establish a series of new candidates for the board, to ensure that shareholders’ interests are the best possible in the sale of the bank.

“There has been promotion of the figure of 500 million kroner in new money and a further 500 million kroner in old money. However, I have not seen evidence that this would be enough, and little evidence, then, that there won’t be a need for larger amounts, if Roskilde Bank is to be preserved as an independent bank,” says shareholder group spokesman, Ole Nielsen.

Even though the two shareholders have a different approach to the situation, Ole Nielsen, however, is not dismissive of cooperation with the other shareholder group.

“We have the same goal: to save Roskilde Bank. If they can use our board candidates to promote their cause, that is fine with me. We will be having a meeting with one of Henrik Langkilde’s people soon, “said Ole Nielsen.

National Bank requires sale

There are several outstanding issues in connection with the new shareholder group’s strategy to keep the Roskilde Bank in their own hands. In the first instance, a sale of all or part of the bank was a condition of the National Bank, as it created a safety net for Roskilde Bank by providing liquidity. At the [Danish] National Bank Department Chief Karsten Biltoft underlines that a complete or partial sale of the bank continues to be a condition of the Central Bank guarantee, and one has not given the green light to Henrik Langkildes model.

Then there is the big question as to whether it is possible to obtain support from shareholders to inject more money and shift part of the bank’s assets to a new company.

Henrik Langkilde says that he has contact with several major shareholders in Roskilde Bank, who are willing to subscribe to additional shares. He acknowledges, however, that there is a long way to go before reaching 500 million.

At Roskilde Bank, CEO Soren Kaare-Andersen stresses that, parties which want to influence the sales process must turn to Danske Markets, which is in charge of sales for the Roskilde Bank.

‘”If there is to be another capital injection, in all cases, a certain amount of money must be provided, and there must be a guarantee for that money. In any case, we must turn to Danske Markets and hear what it will take to start the process,” Soren Kaare-Andersen said.

Original article
Aktionærer i Roskilde Bank vil samarbejde, Berlingske Tidene

Related posts:

• Bankrupt Danish Bank Roskilde sold
• Denmark: Fionia Bank collapses
• The Roskilde Bank problem
• PIMCO message to clients on Roskilde
• Denmark bails out Roskilde Bank

Earlier this morning, I read about the bailout of Roskilde Bank in Denmark through the Sydney Morning Herald.

Roskilde Bank, whose shares performed the worst last year among the Nordic region’s 86 financial companies, became the first Danish lender to be bailed out by the central bank since the subprime crisis started.

The bank found that writedowns had to be made on a “significantly larger scale” than it had expected, Roskilde Bank, based in the Danish city of the same name, said.

It will receive “adequate” liquidity after the central bank discussed the matter with regulators and the Danish government, the central bank said.

Roskilde Bank is now mulling a sale of its assets and would be the second Danish lender to be acquired amid the turmoil on financial markets in the wake of the U.S. subprime crisis.

Sydbank, the third-largest Danish lender, this year acquired BankTrelleborg, which said it had “significant financial problems.”
-Sydney Morning Herald, 11 Jul 2008

Expect many more financial services bankruptcies or bailouts to come in this crisis.

(Update: 11 Jul 2008 11:55EDT)

Apparently there was speculation as to whether Denmark’s largest and best-known bank, den Dansk Bank, would take over Roskilde as JP Morgan did Bear Stearns in the U.S. back in March. Danske Bank says no.

My translation:

Danske Bank not interested in Roskilde Bank

Roskilde Bank announced late Thursday that the bank has been promised liquidity from the National Bank, pending a permanent settlement of the bank’s situation through a complete or partial sale of the bank.

At Danske Bank, spokesperson Jonas Torp said the following in response to the question of whether Danske Bank could be interested in acquiring Roskilde Bank:

“Our expansion strategy is primarily abroad, and we feel that we are have a full product offering [in Denmark], from which to expand from. In Denmark, the focus is on organic growth and not on acquisitions,” Jonas Torp replied to the news agency Direkt.

Original story:

Danske Bank ikke interesseret i Roskilde Bank
Roskilde Bank meddelte sent torsdag, at banken har fået tilsagn om likviditet fra Nationalbanken, mens der arbejdes på en varig afklaring af bankens situation gennem et helt eller delvist salg af banken.

Hos Danske Bank svarer Jonas Torp, der er pressechef, følgende på spørgsmålet om, hvorvidt Danske Bank kunne være interesseret i at overtage Roskilde Bank:

“Vores ekspansionsstrategi er primært i udlandet, og der føler vi, at vi har en fuld palette, og det er den, vi skal ekspandere ud fra. I Danmark er fokus på organisk vækst og ikke på opkøb,” siger Jonas Torp til nyhedsbureauet Direkt.

-Børsen.dk, 11 Jul 2008

In addition, note that Roskilde went to the wall because of bad loans to home builders. This will be a common theme in the US, UK and Spain going forward. Here are some other sources.

Roskilde Bank A/S fell the most since its initial public offering in 1989 after it made bad loans to home builders and needed Denmark’s first central bank bailout in 15 years.The central bank will provide “unlimited liquidity,” and the Danish Bankers Association agreed to cover as much as 750 million kroner ($159 million) of losses, Roskilde Chief Executive Soeren Kaare-Andersen told reporters today. The bank, facing more writedowns than it expected on loans to property developers, dropped as much as 57 percent in Copenhagen trading.

-Bloomberg News, 11 Jul 2008

So it looks like a takeover a-la Bear is out. I have added Roskilde to my list of Bankrupt global financial institutions. For a comprehensive American-only list, see bankimplode.com.

Sources
Danske Bank ikke interesseret i Roskilde Bank, Børsen.dk
Danish Central Bank Bails Out Roskilde Bank, Bloomberg
Roskilde Drops in Denmark After Central Bank Bailout, Bloomberg
Danish Central Bank Bails Out Roskilde Bank , immobilienblasen
Something Rotten in the State of Denmark?, Alpha Sources

For more posts on Denmark or Sweden, see the tags Denmark and Sweden.

Related posts:

• Bankrupt Danish Bank Roskilde sold
• The Roskilde Bank problem
• Foreign investors dump Danske Bank
• Danish banking crisis the worst in Europe
• Denmark: Fionia Bank collapses

According to the Wall Street Journal, Denmark has slipped into recession because of falling house prices. Denmark saw a fairly head rise in house prices during the bubble (58% appreciation from 1997-2005). Since that time, house prices have gone bust.

European recession fears grew Tuesday as Denmark became the first European Union country to slip into a technical recession and a raft of weak data indicated others could soon follow.

In the eurozone, Ireland and Spain are dealing with major housing downturns. Germany, having recovered from its own housing bust after reunification, has also shown economic weakness despite no growth in housing prices this past decade. Stocks in Europe fell on the news about Denmark and poor manufacturing data.

European stocks fell sharply as traders worried about the region’s growth outlook. Economists believe Italy, Spain, Portugal and Ireland to be at most risk of following Denmark into recession. The U.K. and France face, at best, near stagnation.

Denmark is part of a growing list of European countries experiencing a slowdown. In all likelihood, at least three or four economies in Europe were in recession as of the end of Q2. Data will be released soon. Ireland and Spain have already seen one quarter of contraction. In all likelihood, another is on the way as a housing bust takes its toll. Portugal and Italy are two other eurozone economies likely to have contracted in Q2.

A housing slump also contributed to Denmark’s slide into two-consecutive quarters of contraction from the previous quarter, a widely accepted definition of a technical recession.

Danish first-quarter gross domestic product fell a seasonally adjusted 0.6% on a quarterly basis after the economy in the fourth quarter contracted 0.2%, data from Denmark’s national statistics agency showed.

The Irish and Portuguese economies both contracted in the first quarter and are threatened with another in the second quarter. Italy narrowly averted a second consecutive GDP contraction in the first quarter, but faces another test in the second quarter. Spain, while still in positive territory, also is seen at risk as business activity plummets.

The PMI surveys showed Italian manufacturing activity in June recorded a sharper than expected drop to 46.9 from 48.0, the lowest level since December 2001 and below market forecasts of 47.5.

In Spain, manufacturing activity as graded by purchasing managers sank to its lowest level since records began in 1998, falling to 40.6 in June from 43.8 a month earlier.

Sources
Recession Clips Denmark, WSJ, 01 Jul 2008
Naysayers: the housing bubble was obvious

For more posts on Denmark or Sweden, see the tags Denmark and Sweden.

Related posts:

• Denmark’s house prices fall
• European House Prices are slowing
• Nationwide: U.K. house prices down 16.6%
• The latest bubble warning: Swedish house prices
• Europe is next