Bloomberg News

Danish Housing Crisis Spells Pain for Banks, Moody’s Says

June 03, 2012

Denmark’s housing crisis is set to deepen as private debt burdens remain high, property values sink and the job market struggles, Moody’s Investors Service said.

“We see asset quality deteriorating among financial institutions and we expect those pressures to continue because of the operating environment,” Simon Harris, a London-based managing director at Moody’s, said in an interview. “Real estate prices are weakening” and “unemployment has risen and is at higher levels than a couple years ago.”

Moody’s downgraded nine Danish financial institutions last week, including Danske Bank A/S and mortgage lender Nykredit Realkredit A/S, as part of a review of 114 European lenders. Denmark’s economy is struggling to emerge from the fallout of a burst housing bubble and regional banking crisis that has stalled business growth, killed jobs and claimed five banks since last year.

House prices, which have plunged 25 percent since their peak in 2007, will probably fall another 5.5 percent this year, the government said last month. Property values sank an annual 8.6 percent in March, Statistics Denmark said May 31. Unemployment will rise to 7.6 percent this year from 7.4 percent in 2011, the Organization for Economic Cooperation and Development said last month.

The cocktail of declining property values and rising joblessness has left households vulnerable, according to Moody’s. The rating company estimates private debt burdens reached 142 percent of gross domestic product at the end of 2010, twice the European Union average of 79 percent.

‘Negative Feedback’

The weak property market and its fallout for lenders is creating a vicious circle for the economy, as a “negative feedback” loop hampers recovery prospects, Moody’s said in a May 30 report.

Yet investors fleeing Europe’s debt crisis have ignored the warnings. Denmark, which is one of only 12 nations graded AAA at the three main rating companies, pays about 20 basis points less than Germany to borrow for 10 years. Danish two-year yields fell below zero last week as investors pay for the privilege of holding the Nordic nation’s debt.

The country has emerged as a haven thanks to its fiscal discipline. The government of Prime Minister Helle Thorning- Schmidt in May cut the budget deficit target to 1.7 percent of gross domestic product for next year and 3.8 percent for 2012. That compares with a 3.6 percent average deficit in the European Union this year and 3.3 percent in 2013, the European Commission said May 11. Denmark also boasts a current account surplus.

Capital Influx

The central bank has fought to offset a capital influx into Denmark’s economy by cutting interest rates to defend the krone’s peg to the euro. Governor Nils Bernstein warned last month rates can even fall below zero to deter investors from purchasing kroner.

“The Danish economy is strong compared to many of the other European countries,” Henrik Drusebjerg, a senior strategist at Nordea Bank AB (NDA) in Copenhagen, said in an interview. “A strong economy will overall mean that losses among companies and households will decrease in the future. That has also been confirmed in the latest reports from the Danish banks.”

Denmark emerged from its recession in the first quarter after businesses boosted investments and exports grew. Gross domestic product expanded 0.3 percent in the three months through March from the fourth quarter, official figures show. The GDP report suggests companies are proving resilient to Europe’s debt crisis as fixed investments grew 2.3 percent in the first quarter, led by a 6.9 percent jump in purchases of machines and transport goods.

According to Moody’s, investors shouldn’t assume Denmark is safe from Europe’s debt crisis.

“We do see that Denmark is not immune to what is happening in the eurozone,” Harris said. “Yes, it has its own currency and so on, but the Danish economy and banks are exposed” and the operating environment is “relatively challenging,” he said.

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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