It seems like there at two major problems – just to give an impression of how complicate it is:
1) Danske Bank, the housing market and the mortgage banks. This is one Gordian Knots.
- a) The mortgage banks lending is about 3,000 bio. DKK or 1.7 times the annual GDP.
- b) Danske Bank has total of assets of 1,350 bio. DKK or half of the total bank assets in the country – or ¾ to 1½ times of GDP.
- c) Housing loans: Private (1600-1700 bio. DKK) and rental (525 bio. DKK) or all together 1 ¼ of GDP.
The real problem is that these loans are criss-crossed internally in the banks, mortgage companies and there is a lot of double counting.
If you get the impression that it is one big mess? You have the picture! It is like the spilled content of a disorganized woman’s handbag in a pedestrian crossing! A lot of tears, accusations, non-sequitur explanations, refusal of practical solutions and blocking up traffic.
2) The agricultural sector with bank loans of 57 bio. DKK and mortgages of 278 bio. DKK.
Adding up to 1/5 of GDP.
The bad news is, that this debt is distributed to a lot of small, medium and big banks – and involve all the mortgage banks.
If we take Danske Bank and the other big banks first:
The question brought up yesterday was that the banks complain that the failure openly to declare which banks are “systematically vital” – in English: “To big to fail” – is costing the banks money in increased interest rates for their unsecured 3 month credits. Bringing up 3 months credits between banks is one serious indication of deep trouble – which business has a strategic perspective of 3 months?
Any suggestion of perhaps raising deposit rates has been scornfully rejected. Bank employees have been all over the papers that bank customers will have to pay, as there is nobody else. WRONG. Underpaid depositors have a disconcerting habit of withdrawing their deposits.
Now declaring a bank “systematically vital” would entail these banks should raise more equity to remain solvent – i.e. it is not just other people’s money they playing around with. The new European Union regulations are rather blunt in that respect – and the timeframe is rather short (1 or 2 years). Before that some of the state guarantees run out and the loans covered by that guarantee has to be paid back.
There is not great hope that the capital can be raised – and certainly not in time – not after an attempt last year where a sugar-daddy put up about 1 bio. DKK – which promptly disappeared into thin air with the annual report of 2011 – and the bank went into the states garbage bin.
The state guarantees of 2008 are not likely to be repeated. The CEO of the Central Bank said: “Such sweeping and unconditional guarantees must never be granted again.” So that contingency seems more than remote. But it gets increasingly hard to imagine that the State will put up the money without shareholders losing their money.
The only solution when a bank can raise neither capital nor borrow to tie them over till next month is nationalization. Somewhat along the lines that George Bush had to do with Fannies. And the new CEO of Danske Bank whines that the press is unfair – calling the departed CEO a fee-vulture, strangely enough that name has stuck in the popular press. Maybe – just maybe – there is a connection.
The agricultural sector, which has the saving grace of only involving Danske Bank to a limited extend (farmers have never liked Danske Bank):
As farm prices went through the roof it became quite obvious that major investment would be needed to make these buys profitable. So there was invested heavily on top of buying land to high and heavily mortgaged prices. The major problem in this context is that the best and most productive farmers are those deepest in debt.
Some sort of arrangement will have to be found. It would be insane – with rising grain, dairy and meat prices – to put farmers out of business – to many jobs in the food industry hang in the balance – not to mention exports.
We will probably end with State loans of low interest and nearly infinite maturity – all tied to the farm, and not the farmer. This ploy is to prevent the farmer from striking a speculative profit next time farm prices go nuts. In fact the last round of distress loans had just been paid off – when disaster struck again.
Before entering into such an arrangement a realistic assessment of the farm values has to be made. Made on the basis of what a farm can actually earn. Thus guidelines were issued to the banks last year to the banks with tables of the maximum acre value to be assigned – county for county.
Clearly sales prices were wildly misleading – and bankers are neither reliable, nor realistic. The present crop of annual reports shows massive impairments in agricultural banks. It will for some reason not be tolerated that bank keep this type of bad loans.
This is a classical overture to State intervention.
The banks will have to bear the losses of irresponsible lending – and losses on CHF-interest swabs and all the other semi-intelligent tricks so common in banking. This will produce real estate value that can service debt.
This will leave the mortgage and other banks with reduced loans, as the farms are being lifted out of the banks vulture claws. But not before the “equity” has been properly reduced. Only then can the solvency – and capital - needs these agricultural banks have be assed.
During the last year the banks - that have gone into the states garbage dump - have been banks with large loans to agriculture. Not that these bank haven’t exploited other avenues into receivership such as real estate development, speculative swabs, housing loans – you name it – it is there.
But the object is clearly to save farming as a business – and not banks. Some of these bank might have a future, though the extend is to be doubted, as it will mean new capital will have to raised – and that is more than obvious, that that will be near impossible.
So for the present bank and mortgage banks are desperately trying to confuse the issues to the best of their abilities. The government and Central Bank are trying – more or less – one debtor at the time to disentangle this web. It is a tortuous, laborious and slow process under time pressure.
All the inane optimistic propaganda from the banks in 2009-10-11 about “getting through the crisis” was just that: Self-serving untruths, dubious accounting practices and dishonest pretence. In 2008-09 the Central Banks and governments stepped in – not to solve problems; but to prevent disaster from spreading further. The real issues had not been addressed – as anyone with two brain cells would know.
It is not downgrading the emergency measures taken – any sane person would have done more or less the same – but it was nowhere near solving the problems a banking sector gone insane had created. What is more – it was not intended to be this, but the options were very limited.
Now a decade (if not more) of solving problems – one job, one debtor, one business, one farmer - at the time. The economies are recovering alcoholics that will have to live day by day. Some won’t make it: Greece and China are two examples. Greece is in intensive care (with bad prognosis) and China is still rolling with drunken stupor in the sewer.
We will never return to the world of 2008, not due to Moral Rearmament and insincere rue; but from basic observation of natural laws and bare necessity.