At the end of September, Denmark‘s largest bank Danske bank, was extended a three year loan of 20 bio. DKK on top 41 bio. DKK in the ECB. Thus leaving the total outstanding (inclusive of other banks and contortionist banking manoeuvres) amount of 90 bio. DKK [approx. 15 bio. USD) – which the Central Bank (CB) either has guaranteed or lend outright.
Analysis as the facts appears to me:
What has happened is that the CB has lowered the deposit rate on cash to 0% and the week deposits to -.2%. This made the major banks reduce their deposit rate to 0%, and is now according to the Danish newspapers today threatening to demand negative interest rates.
That was in July.
If you look at the graph, you’ll see that that emergency credit has run straight through the banks and back into the CB as deposits. At the same time the CB appears to issue sovereign bonds to absorb the odd 250 bio. DKK deposits (growing p.t. with 5-10 bio. DKK daily!) – Seemingly – of all maturities.
The plan appears to be to starve Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) into submission. On one hand turning the tourniquet on the neck by the means of threatening to raise lending rate – forcing Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) to lower its deposit rate – thus making the depositors withdraw and deposit in other banks. These other banks have no option but to deposit in the CB. At the same time the loan was extended to Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) the amount allowed to be deposited on cash was raised with about the same amount – so depositing banks lose nothing and can thus receive deposits from apprehensive depositors only too happy for the opportunity to see some of their money eventually.
With the other hand these emergency credits are extended only against collateral. As Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) has no high grade securities left, they will have to forward “good” loans as collateral – with a hefty “haircut” – I’ve heard about 1/3 – or collateral of 1½ times the loan.
This will give the CB and bank inspection time to peruse these loans individually for approval as having the status “good”. These loans can then later be lifted out of the banks claws into business bonds for which there will be plenty of investors.
In the mean time investors very un-keen to give the banks the time of day, much less lend them money, will be offered sovereign bonds (very pricy!), so they won’t be tempted to lend the major banks money in repo deal with mortgage bonds.
Here we come down to brass tacks!
The real issue is the mortgage bonds of 133% Danish GDP – of these a third are no service, flexible interest loans refinanced annually! Positively dangerous!
In the event of a nationalisation of the mortgage banks (judging from the stifled whining from “leading personalities” in the papers), that may be a lot closer than most people think, the modest equity in the mortgage banks won’t go far towards reservations for losses.
But the Irish proposal to make banks take losses (see below) has the flaw, that people will just stop paying, as they are being saved by the bank or government – that will not happen in this conjectural model for the nationalisation. The reason is simple:
If the debtor misses payment there will be a move to foreclose. Never mind the property will be bought at book value by the nationalised mortgage bank the final 20% of property value is a bank loan. The mortgage bank will get their collateral. This leaves the bank in the uncomfortable position to either keep paying the mortgage for all the unable and unwilling – or the mortgage bank will foreclose leaving the bank with a loss of 20% property value. However this is only the bank friendly option!
A very large part of the mortgages have a bank guarantee on the slice between 60% and 80% of the property value. If the debtor is foreclosed – guess what the mortgage bank will bid on the auction?
Then the banks won’t buy the bonds from their ex-mortgage bank. Small problem the CB bank will issue the nationalised mortgage banks a loan to buy the bonds themselves. This will indeed raise house mortgage interest rate, but not by much. How much will be decided by the interest rate on the sovereign bonds issued to finance the purchase of the mortgage bonds. Currently selling at an interest rate below the German Bund, there is apparently no shortage of buyers.
If the banks still refuse to take losses they will have to make the mortgage payment, but they can’t! Or rather they can borrow in the CB – but only against prime quality collateral of which there is precious little. So they will have to be really obnoxious towards the unable or unwilling – and in the event of non-compliance move to foreclose.
If the banks insist their “good” loans will be lifted from them – one by one – and leave the bank only with defaulters.
Now there are several ways to make the unwilling take a different view:
1) There is an unknown number that has taken the advantage of the postponed tax on pension savings by taking a flexible interest no service loan in their house. Well by law the creditors can’t get at these savings, but the debtor might reconsider his position if faced with a foreclosure, as in Denmark the “jingle mail” system does not apply. A debt is there till your estate has been closed.
2) The very minute the banks guarantee expires the forbearance of the bank comes to an abrupt end.
If the banks are unwilling, then the CB just raises interest rate – if not by other means then by issuing more sovereign bonds – as there are 250 bio. DKK in cash deposit in the central bank – eager to buy at 0% interest.
It wasn’t (officially) the CIBOR that caught the CB’s attention, but the secured and unsecured 3 month interbank interest rates. Which is perhaps the basis the CIBOR has been ”guesstimated”. But never mind.
My attention was also directed towards this piece in JyllandsPosten (my translation is a bit shaky, but the article does not make perfect sense):
Irish banks forced to impair loans.
Irish bank are to be forced to impair housing loans.
Ireland will probably possibly be the first country to follow this strategy in the attempt to get out of the wake of the housing bubble.
The new law is an attempt to help thousands of Irish home owners by lowering monthly payment and thus prevent a wave of foreclosures on the Irish housing market – according to New York Times.
As a consequence of the country’s new austerity programme covering higher taxes several Irishmen have experienced a decided drop in net wages, making it harder to pay the monthly mortgage. This in conjunction with falling real estate values 50% under the level before the financial crisis forces the Irish government to drastic measures. Means no other country has used.
Distressed home owners.
New York Times writes that the new law should give the banks a strong incentive to impair mortgages at distresses debtors. According to the new bill it will be less problematic for Irish to declare themselves bankrupt – making it easier for people to vacate their house.
This entails the risk of more bankruptcies whereby the Irish banks risk losing considerable payments from debtors. The government hopes the new law will make the banks more inclined to impair the clients’ debt.
The reason this impairment method hasn’t yet been used in countries with distressed home owners is due to fear that when start impairing debt on non-performing loans, that debtors able to pay will choose not to – hoping for a bank restructuring.