Bloomberg News

Danish Banks Drop Guarantee Plea as Central Bank Adds Loans

December 15, 2011

(Updates with Fitch downgrade of Danske Bank in seventh paragraph.)

Dec. 15 (Bloomberg) -- Danish banks are likely to drop demands that the state extend guarantees on loans beyond 2013 after the central bank introduced a three-year lending facility to help ease a funding crisis.

The loans, announced Dec. 8, may help lenders “avoid a credit crunch and banks won’t need to reduce their balance sheets as much or as quickly,” Jan Kondrup, managing director of Denmark’s Association of Local Banks, said yesterday in an interview in Copenhagen. “If there are no limits from the Financial Supervisory Authority concerning this issue, we expect we can solve the challenge with the individual state guarantees.”

Danish banks are still reeling from the fallout of a housing price bubble and a funding crisis sparked by senior creditor losses after the February failure of Amagerbanken A/S. Lenders also need to repay about $30 billion in state-backed bonds by the end of 2013, forcing some to cut lending. FIH Erhvervsbank A/S, which owes the state $7 billion, more than any other bank, said Nov. 9 it cut client loans by 19 percent in the first nine months as part of a retrenchment strategy.

“In the long run, we are not going to be dependent on state guarantees or on the new loan facility from the central bank,” Kondrup said. “But right now we have frozen markets internationally and in Denmark.”

Three-Year Loans

The central bank said last week it will offer banks three- year loans to offset a funding crunch that risks exacerbating a housing slump and sending the Scandinavian economy into a recession. The bank will work out the details of the new facility based on discussions with representatives from the financial industry, it said then.

The Danish central bank’s decision followed a similar announcement by the European Central Bank in Frankfurt the same day to offer three-year loans to banks in the euro region as the debt crisis threatens to engulf Italy and Spain, undermining the balance sheets of lenders holding their bonds.

Denmark’s stressed funding climate has also taken its toll on some of the country’s biggest lenders. Fitch Ratings yesterday downgraded Danske Bank A/S, Denmark’s largest financial group, citing the deteriorating quality of the bank’s Danish and Irish assets and a weaker profit outlook. Fitch lowered Danske’s long-term issuer default rating to A from A+. The outlook for the lender was “negative,” Fitch said.

Default Swaps

The cost of insuring against a default by Danske compared with Nordea Bank A/B yesterday widened the most in a week, credit default swap contracts show.

Finance Minister Bjarne Corydon said last month that Denmark’s banks have received the state support they need and told the industry to focus on consolidation. The government in September passed its fourth bank rescue bill since 2008, designed to encourage healthy banks to take over troubled peers.

The financial crisis will probably force banks to consolidate and may lead to more failures, Standard & Poor’s said Dec. 1. The ratings company cited the industry’s dependency on the markets for funds. Customer deposits at Danish banks are equivalent to 20 percent of total loans, a “relatively low share,” S&P said.

Kondrup said in June that the government’s refusal to extend guarantees risked throwing Denmark into a crisis such as the one endured in Iceland, where the biggest banks failed in 2008 after amassing debts 10 times the size of the island’s economy.

Kondrup, whose association comprises 84 of Denmark’s roughly 130 lenders, renewed the calls to the government in a Nov. 14 interview with newspaper Borsen.

“We hope and expect that we can solve these issues,” Kondrup said yesterday. “In that case we don’t, at the present time, see a reason to have a prolongation of the individual state guarantees. Anyhow we still need to see what the rest of Europe does.”

--Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net.


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