Danish banking crisis the worst in Europe

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 effects 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.

Dansk bankkrise den værste i Europa – Berlingske Tidene


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.