In the long drawn out series of soap operas there has been reached a political consensus from soft ex-communists to right wing – as far as it goes. The solution has been termed Bank Parcel V (not counting a pair of minor slipups), but then royalty name numbering IS running into two digits.
Take this as a case study in financial crisis management.
The Banks Association welcomes the initiative smiling through broken teeth. The deal will have to be confirmed with the EU and anti-trust authorities. The formulation from FIH is “Sale of investment properties and adjacent financial instruments.”
The new “Company” as it is unimaginatively called. Creative bookkeeping does NOT extend into literature. Keep Your eyes peeled!
- 1) The demerger company will be sold to the Trash Can for 2 bio. DKK
- 2) The State is guaranteed 1 2/3 bio. DKK to cover losses in connection with the decomposition of the new “Company”.
- 3) The new company is loaned 13 bio. DKK – which are actually the individual state guaranties pertinent to the investment properties rolled back and paid back as the bonds issued under that guarantee reach maturity. A patch upon a patch.
- 4) At total of 17 bio. DKK of loans is taken over by the new “Company”.
- So far so good: The equity of 1.9 bio. DKK (actually) is covered by a guarantee of 1.65 bio. DKK. The 1.9 bio. Is originally near equity transferred by government a couple of years back. Time that net of 1.65 bio. DKK with 8 (solidity of 12½%) you end up with 12.6 bio. DKK – which is pretty damned close to the round figure of 13 bio. DKK after- impaired loans (originally 17 bio. DKK).
It seems like they have about gotten their sums right.
One should note the difference between guarantee and cash price of ¼ bio. DKK. This dead loss was the threat FIH used. This amount would have cascaded into a building society with several banks having given loans to the building of useless office space in good locations – ruining prices totally in the area.
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Can any other bank use this fix?
In principle yes; but in practice no! It can resolve a liquity problem (cash straining); but NOT a solidity (bankruptcy problem). The main issue with banks and developers is not so much liquidity, but solidity – the developers are bankrupt (assets smaller than liabilities).
How about agriculture as announced?
No, that hasn’t been forgotten – not completely!
- 1) There are 3 bio. DKK to the construction of LFI (another abbreviation – this one means Landbrugets Finansierings Institut – or Agricultural Financing Institute – that didn’t make it clearer! Did it?).
- 2) The problem his is the Trash Can (Finansiel Stabilitet) has about 200 farms from various now departed banks – which they don’t know what to do with. The only thing bankers know about farms is that pigs sound terrible in on end and smell even worse from the other.
- 3) Other banks can turn over their agricultural loans to this “Institute” which is a bank from the sound of it. There does not seem to be a mortgage involved.
- 4) But between us – in strictest confidence – it is not likely that it will be used to any large extend by others.It will mean that the loan and debtor will be turned over to LFI in impaired condition. Now banks do NOT impair. And it is only for farmers with a reasonable hope of servicing debt.
Now to the interesting part:
There is export and financing support for small and medium businesses:
- 1) 15 bio. DKK in export support.
- 2) 20 bio. DKK in export guarantees.
Where have we seen a figure of around 35 bio. DKK before?
- A) We saw them with the Danish guarantee to the EU in the stability pact. (40 bio. DKK).
- B) Danske Bank was around 20 bio. DKK short on December 30th 2011.
- C) Danske Bank has loaned 4 bio. Euroes in the ECB or 30 bio. DKK.
Presumably it is the same amount that has been bantered around – more or less. The currency reserve end of February 2012 was at a record high 500 bio. DKK.
What is apparently happening is that Danske Bank loans 4 bio. Euroes in the European Central Bank – with a maturity of 3 years – guaranteed by the Danish state. These funds are then “invested” in their issued junk real estate bonds by their foreign branch offices.
Now the Danish Central Bank is anything but thrilled by this, as it is in fact speculation against the Danish currency – which with a cash currency reserve of ½ trillion DKK has a very hard time avoiding REvaluation – much to the detriment of Danish exports. Not a good thing. Interestingly the Norwegean Krone has been strengthened in relation to the Danish ditto.
Note the connection to export industry!
Again: As repeatedly pointed out: The international mistrust is NOT to the Danish economy; but the Danish Banks. It is more than obvious that the Danish Central Bank is less than pleased with that state of affairs – and they WILL not tolerate Danish banks speculating against the Danish Krone with money borrowed (directly or indirectly) from the Central Bank. Uncle Nils is a funny man that way!
So apparently what has happened is: Danske Banks fooling around on the currency market with Danish export financing AND purchase of junk real estate bonds of its own issue has to be stopped.
The threat of Danske Bank to call home the export credits from good businesses when strapped for cash – when the junk bonds have to be refinanced. Thus the State apparently will lift the good loans out of Danske Bank. Reducing lending in Danske Bank in the brutal way. A huge defeat for Danske Bank – this accounts for the funny look on the Chairman of the Bank Associations face.
Are You confused: You are supposed to be. The outcome has little to do with agriculture, a lot with bad loans in real estate – and devious purchase of self issued junk bonds to the detriment of the export industry.