By Thomas Borgsmidt

Nationalbanken, the Danish Central Bank, made an unusual move at the end of January 2015 to stop selling sovereign bonds and arranging with the government, that public spending is financed for the rest of the year out of the public account in the Central Bank.

To appreciate the move some background information is handy:

  1. Nordea is the only Globally Systemically Important Bank in Scandinavia. It has branches of importance in Norway, Denmark, Finland, Estonia, Latvia and Lithuania.
  2. Nordea is part owned by the Swedish state as a remnant of the 1990s Swedish banking crisis that has never been even partially resolved. The Swedish state has taxed their companies as the depreciation of investment gave less capital cost and the companies’ liquidity has been maintained with bank loans that did not allow for reinvestment in the capital apparatus. That came to a head in the SAS and Vattenfall crisis in 2013.
  3. Lithuania joined the EUR on January 1st 2015, one year after Latvia did.
  4. Nordea is as big in Denmark as Danske Bank is in Sweden.
  5. Denmark has no public debt worth mentioning – less than half the GDP and has used real estate annuities for high liquidity assets instead. Something now compromised, as investors will not give the flexible interest real estate bonds the time of day.

There is quite a long run up to this:

  • There has been a heated debate with the EU and ECB concerning the liquidity and quality of the real estate bonds. Especially Danske Bank has been fawning over the very high amounts sold abroad. Danske Bank and the other real estate bond issuers even fooled the then secretary of economics, Margrethe Vestager, into the campaign.

Nordea Danish Central Bank

This proposition finally punctured when it came to the head, that the real buyer to Danske Banks real estate bonds was – Danske Bank via a dummy in Cayman Islands. Cayman Islands has been under investigation as tax-evasion vehicle; but in this case, the issue was more sinister: It was to keep dubious loans off the books of Danske Bank. Thus exaggerating the liquidity of the bond.

There has been passing references to the case in the press, but nobody has felt the urge to make an outcry.

  • After that, CB CEO Lars Rohde made a sneering attack on the major banks in Denmark from the rostrum at the bank’s annual meeting. Joining the European Bank Union has been held up by the major banks through all sorts of political delaying tactics and Rohde caustically asked: “What are we waiting for?”

Actually paraphrasing the Norwegean-Danish admiral Tordenskiold (exceptionally foulmouthed) and his address to a Swedish garrison to make them surrender. Coincidental? Possibly.

The speech ended not with a threat, but the promise, that the Central Bank would take the appropriate measures it considered sufficient.

The constant short term refinancing of the real estate bonds with less than one year of maturity leads to considerable capital flow across the Danish-Swedish currency boarder, where the Danish Central Bank defends the exchange rate to the EUR with aggressive tenacity.

On top of the other difficulties, the Norwegean krone has suffered a brutal hit: The fall in oil prices has come on top of a very uncomfortable situation in shipping loans in USD. Both Danske Bank is big in Norway and Nordea is big in shipping.

Negative mortgage interest rate of Nordea

What really hit the head of the nail was probably the negative mortgage interest rate of Nordea to Danish homeowners, a loss Nordea probably expected to recover by a depreciation of SEK and a revaluation of the DKK. There was an advanced warning that something was brewing on September 10th when the Swedish Central Bank (Riksbanken) lowered its interest rates with ¼%. I – for one – was puzzled that Nationalbanken did not follow suit at the time.

Over New Year Nationalbanken has extended emergency week credits to the tune of 35 bio. DKK (5-7 bio. USD), Furtermore the deposits in the Central Bank are a whopping 200 bio. DKK (30-40 bio. USD). These emergency loans have been unusually slow in repayment.

Then the Swiss CB on January 14th caved in! It had simply run out of CHF! The reason for that is probably yet another disaster for RUB with a massive flight to repay the loans in Russia going full tilt from dubious to downright loss: The perfect background for a Swedish assault on the DKK.

There has been some mentioning of massive intervention by the Danish CB – as this is written the validity cannot be verified, as the CB’s monthly balance has not been published.

What is not only verifiable, but also abundantly clear is that the Danish CB lowered the deposit rate three times in the 11 last days of January from – 0.05% to – 0.5% in response to the exchange rate against the EUR not corrected itself with satisfactory speed. Each time locking up more deposits in the CB at progressively lower rate. As we speak nothing indicates these deposits going down, but the next weeks will show.

The CB has probably used quite a lot of DKK to defend the exchange rate, but has probably counted more on the sale of DKK from investors running to USD that has been rising steadily to nervously the last six months. Why sell DKK from the CB when there are a lot of liquidity waiting in blocs?

The CB CEO announcement has just capped the defense: It is a public announcement that the CB is not going to be led by the banks, and the banks will get hurt. There are several police investigation running against leading bank managers in the country now – and has been for quite some time.

The political ramifications are palpable: Just as Greece has its problems with a new government consisting of old, communists and right wing lunatics that make Sarah Palin seem rational and docile in comparison. Denmark and other European nations have their share of irresponsible populists. There is a general election coming up in September at the latest. It seems likely that the prime minister awaits the gagged consent of these parties to the Banking Union – at the least – dubious if she dares take a referendum to enter the EURO simultaneously with the election – though with her nothing is excluded from the realm of the possible.