The real reason for the desperate situation the Danish Banks are in is due to inflated property prices – which is in no way unique to that country. What makes the Danish property market stand out is that several “reforms” to facilitate irresponsible stupidity from the banks.
- The banks took over the formerly independent building societies and their mortgage lending secured in real estate. Generally done the last time the property market went really bad.
- A reform to make fixed interest loans variable.
- A reform to postpone the service on principal – look at the sharp upturn in 2004 – in all curves.
- Freezing taxation on homes.
You name it – they did it. The larger the bank the more unmitigated the disaster and irresponsibility of the management is. As Danske Bank is the largest bank with substantial mortgage banking – you could guess the most desperate straits.
The 2008 blow did indeed send Danske Bank reeling – and crying all the way to the government (to paraphrase Walter Valentino Liberace). The particular idiocy that blew their bacteria brains out was their adventure in Ireland and that the insurance company went bust. That had the Prime Minister begging both the US Government and the EU for an emergency “advance” of in total 10 billion USD.
At that time, there was a general credit crunch – in the sense that credit was not to obtain. In that situation credit is to be extended on a large scale: Provided that the Central Bank does not sit with the losses.
But the claim, that the banks – including mortgage banks – troubles were due to Lehmann Brothers or any other international cause is entirely bogus:
1) Housing prices had (as you can see) stagnated already in 2005! And the number of home sales in 2008 up to the collapse was already down with a third compared to 2005.
2) The problems of obtaining credit for Danish banks were already apparent from mid 2007, where loans in the Central Bank started climbing. The deposits remained stable – so it was not a question of higher volume of transaction that led to the extension of credit from the Central Bank.
No, it was the question of nobody wanting to extend credit at the going rate to finance the banks purchase of own issues.
You should note that the increased extension of credit from the Central Bank from 2007 is fairly accurately the same amount as the stocks of own issues in the mortgage banks – of variable interest mortgage loans.
So the truth of the matter is: The mortgage banks have for YEARS been pawning their junk in the Central Bank. When the totally predictable blow comes from the bankruptcies of several US institutions, then they only give a bit more speed to a disaster in progress.
Predictable in the sense that some of us had a bit more than a hunch of something going very badly wrong.
During 2008 – all the way – the Central Bank extends increasing credit of about 100-150 bio. DKK to the banks (some of which owns the mortgage banks!) – for comparison 30 bio. USD is something in a state like Vermont.
As house prices fall hard on their face in the beginning of 2009 the security of the outstanding loans from the Central Bank is getting very much in doubt as the bond are in fact not covered by real estate value any more.
The large spikes on the red right hand curve are the annual refinancing of the variable interest mortgages, but they are not as interesting as the increasingly grave saw tooth pattern in between them: This must be due to refinancing – now that easy and cheap money from the Central Bank is not as obtainable as before – of the variable interest bonds of one year’s maturity – with credits of 3 months.
Note that the Central Bank had issued a statement on the annual conference of Mortgage Bankers that the Central Bank would NOT – in the future – accept real estate bonds of the issuer as collateral. The cup of coffee you make yourself might be excellent, but hardly 5000 USD worth.
You get repeated flashbacks to Dustin Hoffmann in “Rainman”: “I’m an excellent driver!” The credibility of bankers has indeed suffered – not only in the public eye – at best they are without the most basic comprehension of the world around them.
Now we have to shorten our perspective!
Around 22-23rd of June some of us got the nasty idea that someone was cracking up. It looked distinctively like major investors were getting rid of some bank shares, which was later confirmed.
The following graph is quite confusing and you need to keep your eyes on several balls at the same time:
1) In June the sovereign interest rate is starting to drop – quite seriously. But at the same time the interbank rates are rising steadily and they are crossing over. The bond chosen is the 2 year sovereign – to get the worst maturity issues out of the way.
2) The second point is that the secured and unsecured interests are beginning to split apart. The secured interest rate is not quoted after 25th of November – and when it reappears in the statistics – it is revised as far back as September.
3) Unsecured interest rate has parted company with the CB lending rate apparently for good.
What can we make of all that? Well somebody is having a very hard time figuring out which part of the truth the public is to be informed about – and which version.
Let’s try this one on for size:
a) There is no shortage of liquidity – that is for certain. In the past half year the volume of circulating sovereign bond has increased with 10-15% or about 100 billion. DKK. A flight from Greek bonds might have something to do with it – but that does not explain why the Danish sovereign bond dips under the German.
Despite increased circulation the deposits in the Central Bank are up with about 60 billion DKK.
b) Somebody is having difficulty time borrowing money. The pundit’s version is a credit squeeze; but a more accurate description would probably be to say: That certain parties cannot borrow money because there is a rather big risk of losing them. We are not talking Oprah psychology for bored housewives: We are talking deep seated mistrust and animosity.
c) If we note the sums: The original support for the flexible interest mortgages was around 150 billion DKK – the same order of magnitude we are presently experiencing. Maybe there is a connection?
d) There are some other indicators: 30th of December 2011 pensions and salaries did not enter the proper bank accounts – not on time. An emergency loan from the Central Bank of about 20-30 billion DKK for the period of a week was advanced – to what is reasonably suspected to be to the largest Danish bank. What is more: The day of validity does not seem to have crossed the end of the year – second time around.
At the end of January it took the Central Bank several days to publish figures for 31st of January. The succeeding days were there all right. A very nice lady told mailed me, that it unfortunately was a deplorable clerical error on her part – I bet she has NEVER been unfaithful to her husband – as such.
There are a few too many “clerical” errors for comfort.
There is not a general credit crunch; but (some) major banks are in dire straits to meet their obligations.
It does not have much to do with businesses ability to pay their obligations – it is rather the banks that can’t.