Denmark Creates Rescue Fund for Crisis-Hit Farming Industry
(Updates to add unemployment rate in eighth paragraph.)
Sept. 29 (Bloomberg) -- Denmark’s farming council is planning to set up a fund to prevent the country’s agricultural industry from collapsing as bank credit dries up.
The fund will target institutional investors in an effort to generate start capital of as much as 1 billion kroner ($183 million), the Danish Agriculture and Food Council Business Director Lone Saaby said. The amount will be increased if the fund is successful in its efforts to support the farming industry, she said.
The credit freeze facing Denmark’s agricultural industry threatens to shutter farms and local banks and exacerbate a low- growth trap that has made Denmark the Nordic region’s worst- performing economy. A crisis risks squeezing exports and eliminating jobs, adding to stresses already present in the economy from twin banking and housing crises.
“There is some urgency,” Saaby said in an interview in Copenhagen yesterday. “We could have a complete crash of the farming sector and that would hit a lot of small banks and even larger banks. That would be the worse-case scenario.”
The agriculture and food industry is Denmark’s largest, employing about 150,000 people and making up about one fifth of total exports. The country’s 5,500 pig farmers export 85 percent of production, making Denmark the world’s largest pork exporter.
Under the farm rescue plan, credit provided by the fund would replace bank loans, allowing lenders to remove them from their balance sheets, Saaby said. Still, banks will probably have to foot a loss on the loans, many of which are already non- performing, she said.
“It’s a clear signal to the banks that they have to take some losses,” Saaby said. “We don’t like the situation where the banks provide credit for farms that should have been on the market or restructured years ago.”
Danish registered unemployment rate rose to a nine-month high in August, the national statistics office said today. Joblessness rose to 4.2 percent from 4.1 percent in July.
“Rising unemployment is not what the Danish economy needs right now,” Michael Staehr, chief economist at Sydbank A/S, said in a note. Consumers aren’t spending, hurting businesses which then fire employees, further reducing spending. It is, he said, “a very evil circle.”
Agricultural property prices soared in the last decade amid a nationwide property boom that peaked in 2007. Since then, prices have plunged and this year bankruptcies in the industry almost doubled. In June, regional lender Fjordbank Mors A/S collapsed after writing down bad loans to farmers.
Total farm debt more than doubled in the decade to 2011 as land prices climbed and adjustable-rate mortgages became commonplace, according to an August report by the agriculture council. Debt climbed to 359 billion kroner in 2010 from 165 billion kroner in 2000. Adjustable-rate mortgages accounted for two-thirds of loans last year. A decade earlier, the loans made up 11 percent of total debt.
Fjordbank Mors’ failure may be the first in a string of insolvencies that could stem from the farming sector, Henrik Bjerre-Nielsen, the chief executive officer at Denmark’s bank winding-up authority, the Financial Stability Company, said in an interview. He warns that a farming crisis will hit exports and impede economic growth as it trickles through industries dependent on agricultural produce.
“The farmers, if they do not continue their business, it will have an impact on the slaughter houses and exports of agricultural products,” Bjerre-Nielsen said. “It may have an impact on the overall level of income on society.”
Banks most exposed to farming have a higher ratio of risky loans, making them more prone to losses, according to the Danish Financial Supervisory Authority. About one quarter of farming loans at banks with at least 15 percent exposure to the industry are “very weak,” the FSA said in a May report.
The same ratio for agricultural loans at banks with less than 5 percent exposure to the industry is about 18 percent, the regulator said. Last year, banks wrote down 6 percent of their loans to farms compared with 1 percent in 2007, it said.
Denmark’s banks are reining in lending as they struggle to emerge from a crisis exacerbated by an international funding wall as investors shun the country’s bail-in rules. The Nordic country in October imposed the European Union’s toughest resolution laws, and the two lenders that have since failed both forced losses on senior creditors.
Many banks are either dumping assets or shutting off credit in an effort to shrink their loan books and reduce their reliance on funding. That’s making it more difficult for troubled industries to get the loans they need to stay afloat.
“If you’re a farmer and you’ve been in this situation for maybe three, four, five years, it’s very tough,” Saaby said. “The small banks, they’re being forced by the FSA to try and reduce their balances within the sector.”
Bankruptcies in the farming, fishing and forestry industries rose 79 percent in the first eight months of 2011 from a year earlier, according to data from the Copenhagen-based statistics agency.
--Editors: Tasneem Brogger, Christian Wienberg
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