CIBOR
A troubled day in the ”Shire”
On this the first banking day of September 2012 the preliminary investigation into the CIBOR scandal hit the Danish media. I could plaster your computer with references you have no chance of reading – which will lead nowhere – but I have elected to give a summary and comment to the best of my limited ability, which I hope fairly represents the present status.
The Bankers Association started out with an indignant denial of any wrongdoing; which sort of contradicted the clear acceptance of working towards a replacement of the CIBOR interest rate to “restore trust in the market”.
Minister for Business and Growth, Ole Sohn, is not impressed:
I’m satisfied that the Bankers Association sees the need for firming up CIBOR and recognise the need for inspection and control – in the future. We are interested in that costumer, organizations and authorities can have confidence in the CIBOR-system. This confidence is not present at the moment.
There is no easy way out of this predicament – if any.
Nationalbanken (the CB) has launched the idea of CITA, which should base itself on deals and loans actually made and extended between banks. This does not relieve the conundrum that banks actually don’t lend each other money at the moment – and are not liable to in the foreseeable future! But it does place the onus squarely on the banks.
Nationalbanken is hardly more comforting:
The essence of the Bankers Associations explanation is that the larger difference in interest rate [between secured and unsecured interbank loans] reflects a row of specific factors that are expressed by in a quotation of what a very creditworthy bank could lend to in the market if this had been the case. While Nationalbanken cannot reject this explanation, it does not share the view of what these factors should result in.
The Consumer Council, to which the CB has referred the matter of manipulation, points out that the Bankers Association is taking the Fifth (they are obliged to incriminate themselves!).
Generally, the Bankers Association reminds me of the Spanish film director, Luis Buñuel, who once stated: “I am an atheist – Thank God!”
Be that as it may; but more interesting is the avalanche of lament from the mortgage banks that predict dire consequences for the home owners, as the CIBOR is the basis for a large part of the flexible interest mortgages. Now, the mortgage-banks are over 50% of the same banks that fix the CIBOR.
The Mortgage Bankers Council had a prominent blog article from the director Ane Arnth Jensen. The problem with her statement is that around Christmas 2010, she was severely admonished by the pension fund ATP that the real estate mortgage bond was not under any circumstance to be jeopardized. To which she, on prime time TV, just sat with a silly smile. You simply do not arrogantly wave off your largest investor in public – much less when the CEO of said pension fund today is the CB CEO elect – or rather appointed by royal decree to take office February 1st!
What investors should note is that Danske Bank – Bankers Association is well known to be a mere mouthpiece for Danske Bank – and their mortgage bank (Realkredit Danmark) has profiled themselves prominently as being untrustworthy and unreliable. Now that is not likely to be an astonishing revelation to any serious investor that probably has withdrawn his entrusted money from any association with major banks after the LIBOR – long before that scandal broke. Significantly the concrete judicial steps have been handed over to the Consumers Council.
No the greater problem is Nordea Bank AB (STO:NDA-SEK) and its Danish mortgage bank!
Nordea is partly owned by the Swedish state – a remnant of a financial crisis there some 10-15 years ago (No, those banks have not ever returned completely into private ownership! – Either). As Sweden has its own currency, SEK, it is suspect that one of their largest (and again partly state owned) banks is meddling with another sovereign nation’s currency, the DKK. There is no way that such an action can be conducive to the financial stability of the country being interfered with! The problem is that Nordea has a loan to deposit fraction of 1.25, which means that there is no immediate liquidity lever to force them into compliance.
How much Denmark is outside the Euro-zone is still a half-hearted and unresolved question, as the DKK to all intents and purposes follows exactly what the Euro-zone does – or to be specific: The recommendations of the Bundesbank and German government.
It is obvious for even the casual, but not particularly interested observer, that Danske Bank has been told in no uncertain terms to “bugger off” from any Euro-zone country. Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) leaves National Irish Bank in a dismantled state, where Danske Bank has apparently been told to disengage itself and leave real estate assets on the way out – mind you: In proper financially impaired order. How they fare with Sampo Bank in Finland and their Estonian adventure is not clear to this author at the moment.
Futhermore the Danish CB has guaranteed about 5 b EUR in Danske Bank loans in the ECB (EFSF actually) to quarantine their Hamburg branch. So the message is loud and clear: Don’t mess with the Euro! Specific threats are totally uncalled for, as such nasty eventualities are not going to occur, as both parties are adults.
This leads back to Nordea Bank AB (STO:NDA-SEK): To what extend does the financial “bisexuality” of the DKK put the DKK under the protective wing of the ECB? To be quite honest: I don’t think there is any clear answer! What is reasonable to expect is that the Swedish banks will have to leave the Euro-zone and thus the Swedish financial ambitions in the Baltic region and Finland. How that extraction is proceeding, is far from crystal clear. The Swedish government is not liable to go into details of crumps drizzling from the raid into the ECB cookie jar!
The other major aspect is how the Danish banking sector is developing – or rather deconstructing.
There was a planted “analysis” from Danske Markets (of Danske Bank extraction – just to establish the unreliability and “relaxed” relationship with the real world of the source) that Jyske Bank A/S (CPH:JYSK) and Sydbank A/S (CPH:SYDB) are liable to merge, and that the mortgage bank Nykredit is to buy Spar Nord.
Disregarding the wishful thinking in Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY): The others are in as desperate straits as we are, so the government will of course merge them to produce even greater problems for themselves. Perhaps this is logical to the twisted minds in Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY).
The constructions are not likely in view of the rather disastrous mergers in the Spanish Bankia, where merging several manure piles into one only produced a “systematically important” manure pile. The problem comes desperately close to toppling the tethering Spanish state. If similar mergers – albeit on a minor scale – are going to happen in Denmark, it will have the purpose of restructuring the Danish agricultural debt (strangely they didn’t include Spar Lolland).
The principle could be the same as in an auto chop shop, where you take a number of car wrecks in various stages of disassembly, and from the debris assemble a number of “new” cars. That could be a way ahead. There is little doubt as to lack of progress in consolidating and restructuring agricultural debt. The recently formed LFI agricultural financing institute, under the supervision of Finansiel Stabilitet (the dustbin for dead banks), shows no apparent desire from the banks to hand over their bad agricultural loans – mind you: Properly Impaired – to LFI: Banks NEVER take losses!
Now in Finansiel Stabilitet there is coming a new sheriff to town, the CEO is retiring – again. What could be the prospect is that there will be some new methods of “persuasion” – especially on Jyske Bank and Sydbank – two tin pot hick banks far too big for their footwear, recalcitrant and snotty. One option would be to deprive them of liquidity – the interbank market is close to non-existence. Jyske Bank has a loan to deposit ratio of .9, and Sydbank has 1.01 making it a bit tricky.
No doubt about it, the CB is sucking liquidity out of the market – deposits in the CB are about 40b USD and sovereign bonds of around 20b USD are being issued to cater for the needs of the pension funds, which means that short term loans in repo are not available to the same extent. An increased liquidity squeeze on Jyske Bank A/S (CPH:JYSK) and Sydbank A/S (CPH:SYDB) just might make them see reason. It would also put pressure on Nykredit, whose bank has a loan to deposit rate of 1.34 and Spar Nord with 1.0 – thus being much more vulnerable to liquidity pressure.
There is little doubt that the vast majority of the distressed farmers are going to be rescued. Pork prices are picking up – nobody has argued against Danish bacon quality (except local farmers that couldn’t sell their parasite infested products), so apart from the debt side, the situation is far from hopeless. The golden rule of finance:” A profitable production can always be financed”, applies here. There might be losses, but continuing production will minimize those losses.
There are thus two distinctive, but interrelated, through the web of financial entanglement, issues at work here:
1) The large banks and their mortgage bank (Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) and Nordea) working themselves ever deeper into the mire of housing real estate financing (owned and rental), without a splint of credibility left with both the government and CB calling them all but bold faced liars.
The cure is splitting the banks up into separate companies without crossholding: They are simply too big to live.
2) The rescue of the farmers (and other small businesses) and their attached jobs. This involves carving out the same bit in a large number of banks – and then consolidating and refinancing those bits. The banks will fight that bond and debenture; but any and all of them can be closed any day by the simple instrument of adjusting the value of their collateral.
