According to rumors the Danish banks agricultural loans are to be saved or quarantined into Finansiel Stabilitet (the rubbish bin for banks in Denmark) – but at the present it is not confirmed – and the following remarks must be taken for what they are: Speculations.
The model to be used will presumably be rather along the following lines – if it follows the solution seen with FIH and Finansiel Stabilitet:
- Bad loans (f.i. in arrears and without adequate security) will be transferred to a new limited liability company in the bank. A “good bank”/”bad bank” solution technique. (Locally referred to as blue bank/red bank).
- Equity in this daughter company will presumably be 1/10 of the loans transferred.
- The mortgage bank DLR (Dansk Landbrugs Realkredit) will be taken over by Finansiel Stabilitet.
- DLR is the smallest of the Danish mortgage banks and the one heaviest into agricultural finance – about a third of the agricultural real estate mortgages (approx. 250 bio. DKK – agricultural bank loans are about 70 bio. DKK – just to give the order of magnitude).
- These daughter banks will then be transferred to DLR (at the present owned by rural banks as a shareholding company) with their equity.
- The mother banks in distress will furthermore guarantee with their entire equity for the transferred loans (to avoid punishing banks that have taken impairment when due).
Guesswork? Oh yes – definitely; but not without some basis:
- It has for long been in the cards that some sort of solution to the farmers financial problems had to be found. A solution that would not be a way out for loans caused by fancy speculation in urban real estate and construction.
- It is a de-conflicting of the mess of the banks: Separating the agricultural problems from other types of irresponsible banking behaviour. The rationality behind it is that apart from financing costs the farms are profitable and will be increasingly so – presently all types of agricultural products are experiencing improved prices.
- It is a way of helping the competent farmers that may have expanded at unrealistic farm prices – and invested in state of the art machinery and other facilities – can get a moratorium of some sort. At the same time frivolous consumption and borrowing will not be rewarded.
- A total collapse of agriculture in the country would also cost jobs in the food industry – not to mention exports.
- - There are strong similarities in earlier solutions, necessary because farmers always overinvest when food prices are low in order to reap the benefits of larger scale production and modern equipment. Thus the best farmers are those deepest in debt.
Politically there is a strong resemblance to the solution in 1933 where the Social Democrats and the Liberals put aside their differences and agreed upon a broad solution to agricultural and industrial problems of the “Great Depression”. An indication of the magnitude of the present crisis.
That’s how things work.
At the present some questions remain unanswered:
- How are the remaining 2/3 of the agricultural real estate mortgages to be transferred from the other mortgage banks? The problem is here the equity, reservations and reserves pertaining solely to agriculture (window sill flowerpots are excluded!) The question is here if the different capital centers in the mortgage banks are separable enough.
- It leaves Danske Bank out of the solution. Danske Bank has never had any exposure worth mentioning to agriculture. Not only that. But the solution to FIH is also unfair to Danske Bank – at least in Danske Banks perception of justice. But that will probably be regarded as tough luck.
- The solutions do not solve the housing crisis, but that is probably not the intention. On the contrary: It is a partial disentanglement of the web the banks have woven.
- The really sick mortgage bank (and none of them can be classified as even remotely healthy) is BRF – again without noteworthy agricultural exposure.
I will try to keep this article updated as better and more precise information percolates – there might be some corrections where I have presumed too much.