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It's time to short Danish banks

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"Denmark Races to Prevent Foreclosures as Home Prices Sink

 

 

Representatives from Denmark’s mortgage industry are meeting with the government today in the hope of easing repayment terms on interest-only loans that threaten to unleash a wave of foreclosures this year.

 

The Association of Danish Mortgage Banks and the Mortgage Bankers’ Federation are due to start talks with Business Minister Annette Vilhelmsen to decide how to treat borrowers who won’t be able to afford the interest-only loans they took out a decade ago once amortization requirements kick in this year. Borrowers are also struggling as a deepening property slump drives house prices down to 2005 levels.

Enlarge image

 

Residential properties sit above commercial properties in Copenhagen. Photographer: Linus Hook/Bloomberg

 

 

“Eighty percent of homeowners under 35 years of age are under water. That’s a lot,” Curt Liliegreen, head of the Center for Housing Economics in Copenhagen, said yesterday in a telephone interview. “This is a problem that threatens the Danish economy.”

 

Denmark’s housing crisis, which started when the nation’s property bubble burst in 2008, is showing signs of deepening. Prices sank 2.8 percent last quarter from a year earlier, the two mortgage groups said yesterday. More than 100,000 households will need to have special terms negotiated if they are to meet their loan obligations, according to a February study by the University of Southern Denmark.

‘Rough Time’

 

“The housing market is still having a rough time,” Steen Bocian, chief economist at Danske Bank A/S (DANSKE), said today in an economic report. “Even though the pace of declines slowed last year, it’s too early to talk about a turn-around.”

 

House prices may start to rise this year, though at a slower rate than inflation, Bocian said. He forecast a 1 percent increase in home prices this year and 0.6 percent in 2014.

 

Denmark’s $590 billion mortgage industry -- which is about twice the size of Denmark’s economy -- in 2003 started giving borrowers the option of deferring amortization for as long as a decade. The interest-only mortgages were popular, and have since grown to account for 56 percent of all outstanding home loans, according to the Association of Danish Mortgage Banks. The central bank has criticized the loans, arguing they inflated a housing bubble that plunged Denmark into a recession.

 

The mortgage industry wants the government to approve a plan that would allow homeowners to treat their property debt as two separate loans. The move would give lenders the freedom to let borrowers roll over debt within an 80 percent loan-to-value threshold into new interest-only loans. Only debt exceeding that limit would be amortized. Without the proposed change, borrowers would need to start amortizing the whole amount.

‘Dramatic Increases’

 

“There will be very dramatic increases in monthly payments for many families and it’s happening at a time with relatively high unemployment,” Liliegreen said. “That’s a dangerous cocktail.”

 

Denmark’s property prices have dropped more than 20 percent since their 2007 peak, triggering a regional banking crisis that’s wiped out more than 12 lenders. Gross domestic product shrank 0.6 percent last year, the biggest annual decline in three years, prompting economists at Sydbank A/S (SYDB) to characterize 2012 as Denmark’s “annus horribilis.”

 

While the nation’s unemployment rate, including people in vocational training courses, has hovered close to 6 percent, the number of people outside the workforce rose to its highest last quarter since at least 1996, as record numbers stopped looking for work, Jan Stoerup Nielsen, senior analyst at Nordea Bank AB (NDA), said Feb. 13. The economy lost as many as 8,000 jobs last year, according to Danske Bank.

Foreclosures

 

Foreclosures increased as much as fivefold after Denmark’s housing bubble burst in 2008. Last month, they declined to 361 from 481 a year earlier, according to the statistics agency, after interest rates on mortgages refinanced yearly fell to below 0.5 percent in November and December auctions.

 

The risk of higher interest rates now poses a threat to the housing market’s recovery, Nordea said today. The Stockholm- based lender forecast a 0.9 percent increase in house prices this year and 1.9 percent in 2014.

 

The Danish central bank, which defends the krone’s peg to the euro, will raise rates as part of a gradual normalization of monetary policy that “we expect will push financing costs higher,” Nordea said.

 

The central bank raised its benchmark interest rates in January after investor appetite for AAA rated assets waned amid an improved outlook for southern Europe. Even after that increase, the bank’s deposit rate remains below zero at minus 0.1 percent. The lending rate is 0.3 percent.

‘Facing Customers’

 

The mortgage industry has already signaled to banks, including Nykredit A/S and the home-loan arm of Danske Bank A/S, to start following its recommendations, even before winning government backing.

 

The banks “have to react,” Karsten Beltoft, director of the federation, said in an interview last month. “They’re facing customers right now.”

 

Denmark’s Financial Supervisory Authority has declined to comment on the legality of the measure, leaving it to Vilhelmsen to decide whether banks are in fact violating the law by breaking up the loans.

 

Vilhelmsen said Feb. 20 the approach risks “weakening mortgage bonds’ security.”

 

Interest rates on home loans plunged last year to record lows as investors fleeing Europe’s sovereign debt crisis sought the safety of Denmark’s top-rated covered bonds.

Cause of Collapse

 

Danish mortgage banks aren’t allowed to grant loans that exceed 80 percent of a property’s value. Any shortfall caused by house price declines is filled by the banks, which must provide extra collateral to maintain their credit ratings.

 

A government-appointed committee examining the causes of Denmark’s 2008 housing collapse is due to report its findings within months. The central bank has urged the industry to phase out interest-only lending, while the FSA, as of May 1, may impose fines on banks that don’t ensure new borrowers can afford to repay their principal. The agency also said in November it was looking into the option of requiring depositors to make larger down-payments before gaining access to mortgage financing.

 

“There is a moral hazard problem,” Liliegreen said. “But the question of what happens to society, to the economy, is more important.”"

 

 

 

I'm going to need to look further into this.

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Denmark BOUGHT Trouble - now the UK wants to do something similar (!)

 

“Eighty percent of homeowners under 35 years of age are under water. That’s a lot,”

Curt Liliegreen, head of the Center for Housing Economics in Copenhagen, said yesterday in a telephone interview. “This is a problem that threatens the Danish economy.”

 

Denmark’s housing crisis, which started when the nation’s property bubble burst in 2008, is showing signs of deepening. Prices sank 2.8 percent last quarter from a year earlier...

 

Denmark’s $590 billion mortgage industry -- which is about twice the size of Denmark’s economy -- in 2003 started giving borrowers the option of deferring amortization for as long as a decade. The interest-only mortgages were popular, and have since grown to account for 56 percent of all outstanding home loans...

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/ more: http://www.greenenergyinvestors.com/index.php?showtopic=17785

 

A 2.8 percent drop in a quarter is Baby Step stuff.

 

WE see that in three weeks in HK.

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4 years ago - it was "just a dip"

 

 

But summer cottages were a disaster

 

This would be perfect for a Hobbit:

 

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Denmark Exhausts Stimulus Avenues as Housing Losses Persist

 

By Peter Levring - May 1, 2013

 

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.

 

“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

 

iNEUQ34Wv47A.jpg

Denmark’s $300 billion economy probably contracted last quarter, after shrinking 0.7 percent in the three months through December,

according to Danske Bank A/S and Svenska Handelsbanken AB. Photographer: Freya Ingrid Morales/Bloomberg

Denmark’s $300 billion economy probably contracted last quarter, after shrinking 0.7 percent in the three months through December, according to Danske Bank (DANSKE) A/S and Svenska Handelsbanken AB. That would mark the nation’s third recession in less than four years, singling Denmark out as the Scandinavian nation hardest hit by the global financial crisis.

 

The country has yet to surface from the fallout of a burst housing bubble that’s sent property prices plunging more than 20 percent since 2007. The average sales price for a single-family home fell 5.9 percent in January from a month earlier, the statistics office said April 5.

The government of Prime Minister Helle Thorning-Schmidt won lawmaker backing last week for a 75 billion-krone ($13 billion) package of support measures including corporate tax cuts and tax breaks on home refurbishment.

===

/more: http://www.bloomberg...es-persist.html

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This scenario in Denmark makes me think of Iceland.

 

 

 

 

 

 

http://www.businessweek.com/articles/2013-05-09/iceland-gets-tough-with-foreign-creditors-of-failed-banks

 

"Iceland Gets Tough With Foreign Creditors of Failed Banks

 

 

Iceland is a Nordic free-market democracy with glacier-covered volcanoes and hyperactive geysers. If you’re into mind-bendingly complex song lyrics, there’s Björk and Sigur Rós. In the rarefied world of global finance, Iceland is also where local pols and central bankers trample on the interests of bondholders like a herd of marauding reindeer. At least that’s the perspective of foreign bondholders and distressed asset hedge funds hoping to recoup their investments in three Icelandic lenders—Landsbanki Islands, Glitnir Bank, and Kaupthing Bank—that defaulted on $85 billion in debts in 2008.

 

In a parliamentary election on April 27, the Independence Party—which was in power during the meltdown—and the Progressive Party together won just over 50 percent of the vote. Both ran on an anti-austerity platform of lower taxes and home mortgage relief, to be funded in part by forcing overseas creditors to accept losses on the $3.8 billion in krona-denominated assets they’re owed by three failed lenders. Also in play is $8 billion in deposits and loans owed to overseas creditors that have been trapped in Iceland, thanks to capital controls imposed in 2008.

 

Talks are under way in Reykjavik to form the new government. Sigmundur David Gunnlaugsson, chairman of the Progressive Party, has called for steep reductions on the amount owed to more than 100 creditors, including Royal Bank of Scotland (RBS), Deutsche Bank (DB), Goldman Sachs (GS), and distressed asset investor Davidson Kempner Capital Management, a New York hedge fund. The new government aims to “write down the kronur claims of creditors of the failed banks, which everybody knows have to be written off,” Independence Party Chairman Bjarni Benediktsson said in a mid-March interview. Either Gunnlaugsson or Benediktsson is expected to be named prime minister, and new debt negotiations may begin this summer.

 

Iceland’s politicians won praise from American economists including Paul Krugman and Joseph Stiglitz for refusing to bail out Iceland’s banks, whose balance sheets had ballooned to 10 times the size of the island’s economy. Unlike many other nations, Iceland did not use taxpayer money to protect bank bondholders and creditors. The strategy worked: Iceland is no longer a ward of the International Monetary Fund, which together with Finland, Sweden, Norway, and Denmark spent $4.6 billion to bail out the country. Its economy is expected to grow 2.1 percent this year, according to the Central Bank of Iceland. The unemployment rate has fallen to 5.3 percent from a peak of 9.3 percent.

 

Even so, the new regime faces a dilemma: Play too rough with foreign creditors and the country runs the risk of becoming a financial pariah. “Iceland will be locking itself out of the international debt markets and reducing the country’s chances of raising investments,” says Lars Christensen, chief emerging markets economist at Danske Bank (DNSKY).

 

Beating up creditors may not be a smart legal strategy. “If the government forces the creditors to negotiate on its terms, it can be tantamount to a de facto expropriation, which can afford the creditors the right to damages,” says Hróbjartur Jónatansson, a bankruptcy attorney in Reykjavik. Leaving capital controls in place indefinitely could be viewed by a court as an illegal asset seizure, he says.

 

Iceland is paying a price for its stance. The krona has fallen 40 percent against the euro since 2008. That’s raised import prices and resulted in an annual inflation rate of 3.3 percent as of April. Families, already hit hard by a housing market bust, are carrying heavy debt loads. There are also about $11.3 billion in consumer loans in the nation with repayment terms linked to changes in consumer prices.

 

Both victorious parties support lifting capital controls, but Iceland’s trade balance and foreign exchange reserves are too small to pay the bank creditors all at once without cratering the currency, the government says. The government will need to demonstrate that it really can’t afford to pay back creditors without more lenient terms in future debt talks, according to two people close to the creditors who declined to be identified ahead of the negotiations. They add that since the crash, foreign creditors haven’t seen a dime. Repayment would have to take place “over a long period of time,” says Gylfi Magnússon, an economist at the University of Iceland.

 

Big banks and hedge funds aren’t the only creditors hoping to get paid back. Landsbanki Islands has repaid only $5.7 billion to the Netherlands and Britain to compensate depositors who lost more than $11 billion five years ago in a high-interest online savings product called Icesave. The Iceland government has said the bank will pay the full amount, but hasn’t said when."

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