Denmark Rejects S&P Analysis as Mortgage Bank Aid Ruled Out

Denmark dismissed an analysis by Standard & Poor’s that assumes the nation’s mortgage bond market will get government support if it gets into trouble.

“That’s not a fair assumption,” Business Minister Henrik Sass Larsen said in an interview yesterday in Copenhagen.

Denmark, which in 2010 became the first European nation to pass a law preventing bank bailouts, is now signaling it will take an equally hard line with its mortgage industry. The stance comes from a country whose $550 billion home-loan market -- the world’s biggest per capita -- is more than 1 1/2 times gross domestic product.

About a third of Danish mortgages are refinanced annually in bond auctions. The government has proposed a law that seeks to address refinancing risks by forcing bond investors to accept 12-month maturity extensions if an auction fails or if interest rates jump more than 5 percentage points.

The Danish mortgage industry’s size and systemic importance this week led Standard & Poor’s to conclude that the government would have to step in should auctions fail. According to the rating company, Denmark’s economy will already be in a crisis warranting some form of intervention if mortgage banks can’t sell their bonds.

Krone Speculation

“There will be a lot of other issues on the table besides the refinancing of the mortgage market in itself,” Alexander Ekbom, an analyst at S&P in Stockholm, said in an interview. “We’d probably be looking at speculation on the Danish krone, we’d probably be looking at a very high inflation scenario.”

Since the global financial crisis started in 2007, Danish policy makers have stepped in more than once to support the mortgage market, which is dominated by Nykredit Realkredit A/S and the home-loan unit of Danske Bank A/S.

Mortgage banks’ repurchase agreements with the central bank more than doubled to exceed 200 billion kroner ($36 billion) in 2008 after lenders struggled to sell their bonds on the market, according to a government-commissioned study published in September. The same year, Denmark adjusted rules governing pension fund investments, preventing a sell-off of mortgage bonds.

Not Likely

In the event of a similar crisis, “would we think it’s feasible that the government wouldn’t have done anything to support the most important market in the country? No, we don’t think that’s very likely,” Ekbom said. “We’re not saying how exactly, but we do think there will be something. Whether it’s enough to avoid setting off the triggers is a different thing.”

Governor Lars Rohde said in December that Denmark’s proposed maturity extension on mortgage bonds means banks “are not reliant on the central bank as a backstop.” Rohde, who is also the head of Denmark’s Systemic Risk Council, uses monetary policy to defend the krone’s peg to the euro.

Larsen said yesterday a majority in parliament will back the mortgage law after agreeing to limit the 5 percentage point rate trigger to one- and two-year bonds. The government faced a deadline today to fine tune its proposal. Parliament is due to vote on the law’s implementation on March 31.

S&P said this week the law alleviates the rating company’s “immediate concerns” while falling short “of neutralizing the risk from the banks’ heavy reliance on short-term funding,” in a Feb. 4 statement.

The view at Nykredit, Denmark’s biggest mortgage lender, is that S&P’s “special language makes it difficult to interpret their views,” Chief Financial Officer Soeren Holm said yesterday in an interview. Still, the takeaway is that “we’ve escaped the major rating risk and we’ll continue to be motivated to shift borrowers away from one-year loans, but the time pressure is off,” he said.

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