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Danish Bank Default Risk Reduced After Rescue Plan, S&P Says

Danish legislation aimed at spurring bank industry consolidation will reduce the risk of default after lawmakers made it easier for lenders to avoid the Nordic country’s bail-in rules, Standard & Poor’s said.

“This is creating new tools to solve problems,” Per Toernqvist, a Stockholm-based analyst at S&P, said yesterday in a phone interview. “These measures will likely lead to fewer failures.”

Moody’s Investors Service, which downgraded six Danish banks in May, including the country’s biggest Danske Bank A/S, signaled today it will reconsider its view on Denmark’s lenders.

Lawmakers yesterday backed the country’s fourth bank bill since 2008, enabling lenders to sidestep legislation that has twice triggered senior creditor losses and left most of Denmark’s roughly 120 banks with no access to international funding markets. S&P said last month 15 more Danish banks could default, costing as much as $2.3 billion in the next three years.

Denmark’s bail-in law, effective since October, “created an incentive for good banks to wait for bad banks to fail and share the losses with senior creditors and the government,” Toernqvist said. “With this new proposal, you open the door to a much broader spectrum of solutions. It might be that you have failures but there are definitely now opportunities to find other solutions.”

Moody’s Assessment

Moody’s is assessing the details outlined in the political agreement on a new Danish banking package for any potential credit implications, said a press official at the rating company, who declined to be identified by name.

The latest bill seeks to encourage takeovers before troubled banks are forced to declare themselves insolvent. The bill allows the state to assume bad loans in the event of takeovers, Economy Minister Brian Mikkelsen said yesterday. The plan, which will be funded by the financial industry, also lets merging banks tap the depositor guarantee fund. Denmark’s parliament still needs to give the bill final approval before it can take effect.

“We’ve provided a framework for healthy banks to take over unhealthy ones,” Mikkelsen said. “The government will not lose money and the sector will pick up the bill. This package will help improve the perception of Denmark’s bank industry abroad.”

An earlier bill designed to encourage consolidation failed to prevent the collapse of Fjordbank Mors A/S, which in June became Denmark’s second regional bank after Amagerbanken A/S to resort to the country’s bail-in laws.

Lower Risk

Yesterday’s plan will also help provide funds in the event of takeovers by extending state guarantees originally due to expire by 2013 by as much as three years. In addition, the government will set up a board to identify too-big-to-fail banks.

“The new bank deal will remove tail risks from investing in Danish banks,” Lars Rohde, chief executive officer at the ATP fund, the biggest investor in Danish shares, said yesterday in an interview. “This has made it safer to invest money in Denmark’s banks as it reduces systemic risks.”

ATP owns about 3 percent of all Denmark’s listed equity, including shares in Danske Bank A/S, the country’s biggest. Rohde wouldn’t say if the Hilleroed, Denmark-based fund will increase its holding of Danish bank shares as a result of the new legislation.

Danish financial shares rose yesterday as the bank sub-index of the OMX Copenhagen Index advanced 0.7 percent compared with a 1.l4 percent decline for the overall gage.

Liquidity Pressures

Lenders including Aalborg-based Spar Nord Bank A/S, Denmark’s fourth-biggest listed bank, are dumping assets to generate cash in the absence of market demand for their bonds. Skive, Denmark-based Sparbank A/S yesterday said it will cut 35 jobs.

“There’s no doubt that there are some banks in trouble and we’ve now given the sector the tools with which to solve this,” Mikkelsen told TV2.

The central bank has also stepped in to help ease liquidity pressures. The bank said last week it will accept bank loans as collateral. The measure, which becomes effective Oct. 1 and runs until further notice, will “ensure the banking industry has sufficient liquidity ahead of the 2013 expiration of state-guaranteed bonds,” said Thomas Hovard, chief analyst in corporate bonds for Danske Markets, a unit of Danske Bank.

“The economic recovery in Denmark over time will sort out the health issues of the Danish banking industry, and that may take some time,” said S&P’s Toernqvist.

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