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Denmark to Provide Banks $72.6 Billion Liquidity Lifeline

Denmark to Provide Banks $72.6 Billion Liquidity Lifeline
A Danish 100 krone note and coins. The country’s lenders face a deepening crisis that threatens to stall a recovery in Scandinavia’s worst-performing economy. Photographer: Chris Ratcliffe/Bloomberg

Denmark’s central bank said it will provide as much as 400 billion kroner ($72.6 billion) as part of an extended collateral program to offer emergency liquidity to the country’s banks.

Lenders will also be able to borrow for six months, alongside the central bank’s existing seven-day facility, at a rate that tracks the benchmark lending rate, currently 1.55 percent, the bank said in a statement today.

“It’s very positive,” said Thomas Hovard, chief corporate bond analyst at Danske Securities in Copenhagen, a unit of Danske Bank A/S, in a phone interview. “It’s quite cheap and it will provide a significant amount. The price for the six-month facility is the same price as for the seven-day facility, so it’s a flat yield curve. A lot of banks will utilize this.”

The country’s lenders face a deepening crisis that threatens to stall a recovery in Scandinavia’s worst-performing economy. Two Danish bank failures this year triggered senior creditor losses, leaving international funding markets closed to all but the largest banks. Lawmaker efforts to spur a wave of consolidation and help banks sidestep Denmark’s bail-in rules have so far failed.

“The expanded program is designed to supplement financial institutions’ access to taking loans and thereby build a bridge to a situation without state guarantees, when these expire in 2012 and 2013,” central bank Governor Nils Bernstein said in the statement.

Stock Move

Danish financial stocks outperformed their European peers. Denmark’s banks lost 1.2 percent, versus a 3 percent slump in the 46-member Bloomberg index of European banks as of 11:46 a.m. in Copenhagen. Danske Bank, Denmark’s biggest lender, gained as much as 1.6 percent, before trading 1 percent lower at 79.75 kroner. The difference between Copenhagen’s interbank offered rate and the equivalent euro rate tightened the most in at least a year, with Cibor quoted 18 basis points lower than Euribor.

Denmark’s liquidity lifeline mirrors programs in the euro area, where the European Central Bank has been pumping cash into the region’s money markets, including dollar liquidity, to support lenders.

The Danish central bank’s program is “broadly consistent with what the ECB has been doing,” Nick Anderson, a London-based senior analyst at Berenberg Bank, said by phone. “This was all about smaller banks. It’s clearly helpful.”

Refinancing Debt

The central bank is boosting its liquidity support to help lenders stay afloat as they struggle to refinance 158 billion kroner in debt backed by a state guarantee that expires over the next two years. The central bank’s pricing means “people will dare to use it,” Hovard said. “ There will be no stigmatization from using the facility. It’s so cheap that even the strong banks will consider using it.”

Still, the head of the country’s bank resolution unit, the Financial Stability Company, said the emergency facility may not be enough to prevent further insolvencies.

The program “will probably not solve all problems,” Henrik Bjerre-Nielsen, director at the Financial Stability Company, said in an interview before the plan was announced. “The kind of financing you can get by borrowing against your high quality loans at the central bank is not medium-term financing. And medium-term financing is crucial for having a proper financing strategy.”

Dumping Assets

Banks are cutting lending and dumping assets as they struggle to refinance loans coming due. About 75 of Denmark’s 90 local banks probably need to either be bought or wound down, Financial Stability Company Chairman Henning Kruse Petersen said in an interview this month.

Mergers are being hindered by skepticism amongst Denmark’s healthier banks about what may be lurking on the balance sheets of their troubled peers, according to Ulrik Noedgaard, the director general at the Financial Supervisory Authority.

Some banks have purchased assets from their failed peers. Jyske Bank A/S, Denmark’s second-biggest listed bank, today said it bought parts of Fjordbank Mors A/S, which failed in June after losing money on loans to real estate and farming.

The healthy parts of Amagerbanken A/S, which failed in February, were bought by Faroese BankNordik P/F in May. The Torshavn, Faroe Islands-based bank was downgraded this month by Moody’s Investors Service, which said the purchase added risk.

Refinancing Debt

FIH Erhvervsbank A/S, the largest holder of state-guaranteed bonds, according to Financial Stability, probably will tap the liquidity lifeline, Chief Executive Officer Bjarne Graven Larsen said in an interview before the program was announced. The bank holds about 45 billion kroner in state-backed bonds, after repaying about 5 billion kroner this week.

The central bank today didn’t specify how long the program will run. In August, the bank said the facility will last “until further notice.”

Banks will be allowed to include central bank cash from the program in their liquid assets to meet liquidity requirements, the FSA said in a statement today.

“For banks that are very dependent on the central bank’s lending facility, we will place emphasis on their efforts to achieve sustainable funding,” the FSA said on its website.

The new facility will be opened monthly, with the first offering on Oct. 28, the bank said. Banks will be able to pledge as collateral the remaining balance of loans as well as 90 percent of agreed overdrafts less any set-off and a 3 percent haircut on loans and overdrafts denominated in euros, the bank said. The collateral value is then calculated as the amount arrived at by using this calculation, minus a 25 percent haircut and a margin of 10 percent.

Banks using the facility need to pledge so-called top-up collateral if the value of the loan portfolio falls by more than 5 percent. Banks can’t use credit given to other financial institutions as loans for this facility, the central bank said.

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