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 three-year 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 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 and call in loans. 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.”
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.
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.
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 some 90 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.”
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