Readers who want some background and can read danish, can check out-this link.
The situation is strange as Denmark is not a member of the EUR, but is chairing the EU this half year – meaning that the umpire has to leave the field when the game gets nasty. This has its advantages – a German and French secretary of Finance dealing out tough hate is not a sight for sensitive dispositions.
But don’t be fooled by Margrethe Vestagers (Danish secretary for Economy) well manicured hands (and feet for that matter), sweet teasing smile, twinkling wounded-doe eyes and bleeding-heart-liberal agenda.
She is one tough broad. Bankers trying to pocket her will find they had put Lucrezia Borgia in charge of mixing drinks. What is more, she has a brain and a practical background in the ministry responsible for banks – she has the same knowledge about toilets a plumber has.
Vestager surmises that the EU will perhaps not slavishly copy the Danish methods of dealing with bad banks; but they will take inspiration. This apparent overestimation of own influence might have some merit to it:
- Schäuble has not only indicated that he is open to ideas: He has downright screamed for them
- Denmark has unwittingly functioned as a pest control laboratory due to the strange banking structure. So far there have been 5 separate “solutions” to the problem of flopped banks – each time a method of dealing with a bankruptcy had been tried out: Then the next hillbilly bank revealed a different path to perdition.
- There is a problem with European banks: They operate in several countries with varying affiliation with the EUR. There is a desperate need for reasonably uniform rules, because any crack in the pipes they will drip under pressure – if not downright burst.
- The situation plays straight into the strength of Danish administration: Any law will have a hearing phase, where different organizations will be invited to comment on the proposed law. These organizations then start collecting points of view in their constituency. If there is a change in rules concerning honey – every last beehive will have been heard – I mean that literally!
Another little noticed work has been the new rules concerning impairment.
Forget about it! It is barely legible even in Danish.
It is a well known experience that banks don’t take impairments – and certainly not losses – if they in any way can avoid it. The reason is simple:
- If a bank takes a loss it will be a cost to be deducted from the profit, but worse is that equity is the difference between assets and liabilities. If you diminish assets you automatically diminish equity (that is actually the point about equity). Nothing like losses hurts solvency.
After 2008 the administrative way of dealing with the problem was to regulate the required solvency so a bank with obvious (but still within legality – if you agree to a moratorium the customer hasn’t violated the agreement) unimpaired losses was required to reserve capital to take these losses.
The next step was to define objective indications for distressed debtors – deferred payments, bankruptcy are criteria that springs to mind – death is another. That was fairly easily done. The problem however was that the value of the collateral was estimated at a very unrealistic historical level – for developers based on little more than wet dreams.
The law has not been changed except as to the extent that Denmark is not obliged to adhere to the general EU standards if the bank has foreign subsidiaries. The Danish position outside the Euro has been exploited. Several banks have closed their Swiss branches (Sydbank is one of them – the trade of Swiss cheese to Danish dairy farmers is very limited).
No the devil is in the details!
The questionable evaluations of collateral have been hidden by the very low interest rates resulting from different quantitative easing. This led to a situation where “fair market value” was a joke – the simple matter of fact was there is no market to be fair in!
- There were 65 farms sold in 2010 in all of Denmark where the agreed price could be said to reflect some sort of market sense (you have to disregard distress sales, deals between family members etc.) There hasn’t been quoted any 2011 sales.
- Rental apartment blocks have not been traded seriously since 2008. It is not a lack of buyers – pension funds are generally in principle interested, as it is a good long term investment that fits the pension funds long term obligations. In fact most pension funds have a janitor service and local building firms lined up to cater for maintenance paid over the rent. Let’s just say that path has been investigated – the sellers “price idea” has called forward some loud and very tactless laughing fits before sitting down at the table.
To get beyond this deadlock where realistic values cannot be forwarded due to low interest rates and realistic interest rates cannot be allowed, as that would make banks and their debtors default on the spot.
In the autumn 2008 the interest rate on variable interest mortgages briefly rose to 5-6% causing immediate Central Bank action. It took the Central Bank more than a year to get out of that predicament.
So what do you do?
You change the executive orders:
- You define fair market price (on a market that isn’t there) on farms in relation to the expected yield. Then you calculate backwards and arrive at a value pr. acre.
- Same thing with housing development projects.
- Then you start specifying impairments. You still have the objective indications of distress, but there are ways around that – deferred payment and placement with guaranteed repurchase price. Banks are very skillful in meandering.
- Then you sharpen your definitions of distress – bankruptcy is one readily available – no matter if the debtor has serviced the no-service loan or not. The trick is, there will be a mandatory impairment even without the debtor being in distress.
- This will leave the majority of home owners in limbo – for the time being: Nobody is interested in evicting half the capital. House sales will stagnate as other real estate sales; but for the moment they are not too bad off.
Furthermore it is insane to form an opinion on house prices when rental values haven’t been used for years on rental developments. Here is another problem: Since 2004 there has build far too much – so where will the apartment rents end?
What you can do is to ease taxation on income, as those with the highest income are those deepest in debt and most in distress. The lost tax revenue is then reimbursed by taxing oil, sugar, fat, tobacco.
An investor should ask himself: Do you think this seems like a workable plan to a German government and parliament? You bet it will!
The ploy is that losses will primarily be borne by the shareholders and not the taxpayers. Will some banks go belly up: Very probable, but then new capital will be put up by the states.
The EU and particularly the EUR-zone is