Denmark gets on the deposit guarantee train: all aboard!
EU governments have woken up to the need to defend the banking system by guaranteeing all or some of their citizens’ bank deposits. After Germany, Ireland and Greece, Denmark is the latest to do so. And Denmark may also be the one country that needs to do so the most of the remaining EU holdouts.
UPDATE 6 OCT 2008 918 ET: I just found out that Austria followed Germany in Guaranteeing bank deposits (See story here). So, that makes Ireland, Greece, Germany, Austria and Denmark.
Just 12 days ago, the Danish daily Berlingske Tidene pointed out that the Danish Banking system is in dire straits.
Danish banking crisis the worst in Europe
The Danish crisis is quite different and much worse than what we see in the rest of Europe. That is the ruling from large megabank UBS and credit rating agency Moody’s.
And UBS predicts more bank failures this year, writes Børsen. The housing and property bubble is more pronounced than in the rest of Europe – except in Ireland. While banks in the countries around us suffer from the same difficult problems in providing liquidity, the Danish banks are hit doubly as the loan guarantees are eroding sharply.
Unlike elsewhere in Europe, where it is primarily a question of restoring confidence, there is real risk that the quality of Danish banks’ assets will fall yet further due to falls in the collateral for the loans in the coming months.
“Danish house prices rose enormously until autumn 2006, when the housing starts also peaked. The build out was so large, it was obvious that prices would fall drastically, and this is what we see now. It is not only a question of raising capital, but that the quality of the underlying assets – namely the prices of the properties – is falling,” Andreas Håkansson, who has covered the Danish banking for UBS for the last eight years, said to Børsen.
Chief analyst Janne Thomsen from Moody’s in London points out that the collapse of Roskilde has created cracks in the paint and exacerbated the situation.
Let’s hope the move by the Danes will have a calming effect on the markets as we now seem to have started a trend with bank deposit guarantees to calm jittery depositor nerves. Note: this is a blanket guarantee unlike the partial guarantee offered by Angela Merkel’s government in Germany. It’s only a matter of time before other European states employ similar tactics to restore banking confidence.
Denmark will guarantee all bank deposits in a deal funded by the country’s commercial lenders to bolster financial stability in the Nordic country.Commercial lenders will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses, the Copenhagen-based Economy Ministry said in a statement on it’s Web site today.
“Had a solution not been found it would have had serious consequences for the country’s companies and citizens,” the ministry said in the statement. “The financial crisis has led to a freezing of the money market, making it extremely difficult for even healthy, well-run Danish banks to secure the necessary liquidity.”
The 35 billion kroner are equivalent to 2 percent of Denmark’s gross domestic product, and emphasis had been placed on reaching a deal that wasn’t paid by tax payers, the ministry said. The decision comes after the U.S. last week passed a bill to spend $700 billion on purchasing assets from troubled lenders, and as European leaders agreed on steps to limit the economic fallout of a deepening credit crisis.
“The financial crisis means that banks won’t lend to each other,” Finance Minister Lars Loekke Rasmussen said in the statement. “This is not linked to the fundamental economic situation in Denmark.”
The agreement can be extended should there be need for such a move, the ministry said. Before today’s deal, the ceiling on deposit guarantees had been set at 300,000 kroner.