“When we ask our companies, small- and medium-sized, they say they are experiencing a credit crunch and it has become worse in the last month,” Karsten Dybvad, chief executive officer of the Danish Confederation of Industry, said in an interview in Copenhagen.
Dybvad’s group, which represents 10,000 Danish firms, wants the financial regulator to give banks more leeway in meeting capital requirements so they don’t call in loans and fuel a vicious circle that’s stifling the $300 billion economy. In a December survey of confederation members, two thirds said they had limited access to financing, while one in five said an absence of funds was the biggest obstacle for growth.
Three Danish banks, including Amagerbanken A/S (AMAG), failed last year after the FSA required them to restate bad loans, leaving them in breach of capital rules. Two of the failures pushed losses on to senior creditors and exacerbated a funding squeeze that’s frozen most of Denmark’s 120 banks out of debt markets.
Bank Failures
More lenders may collapse this year as Denmark’s regional bank crisis worsens, the Financial Supervisory Authority’s Director General Ulrik Noedgaard said in an interview last week. The FSA introduced stricter reviews of loan books last year, after finding banks understated writedowns, and has been enforcing the more rigorous standards through surprise audits.
The regulator today proposed that lenders tighten reporting standards further to reflect declining property values more accurately in loan portfolios.
According to Dybvad, banks are reacting by restricting credit and calling in existing loans. Even healthy companies are being denied credit, according to a Jan. 16 report by the Danish Association of Auditors.
“You have to do it more smoothly so that you don’t over- react,” Dybvad said. “There’s an increasing number of companies having difficulties financing their operations and also difficulties financing investments.”
Denmark’s 173-member all-share index lost as much as 1 percent today before trading 0.6 percent lower at 2:10 p.m. local time. Danish shares underperformed their European peers, with the Stoxx Europe 600 losing 0.4 percent.
Vicious Circle
The Organization for Economic Cooperation and Development warns an absence of credit may fuel a vicious circle in which businesses lack the funds to run their operations, leaving them unable to pay their debts.
“This in turn could worsen loan impairments in the corporate sector, putting pressure on the financial sector,” the Paris-based OECD said in a Jan. 26 report. “Some small banks are especially exposed to agriculture, which faces high debt, falling land prices and funding problems.”
Agricultural debt swelled 2.6 percent to 359 billion kroner ($63 billion) in 2010, the Danish Agriculture and Food Council estimates. Commercial farms have lost as much as half their value in some parts of Denmark, leaving 6 percent of the industry technically insolvent, according to the council.
Denmark is also struggling to recover from a property bubble that burst in 2007, throwing the economy into a recession and killing jobs. House prices fell an annual 8.5 percent in November as the gap between bid and ask prices widened. Prices will have slumped 25 percent by 2013 since the crisis started in 2007, the government-backed Economic Council estimates.
Bankruptcies
Loans to farming, construction and real estate made up 26 percent of total lending at the end of 2010 at banks with less than 50 billion kroner in working capital, according to a May report by the central bank. For the biggest banks, the corresponding figure was 16 percent.
Small- and medium-sized enterprises, including retailers and construction-related businesses, are now struggling to stay afloat. The number of bankruptcies rose to 511 in January, adjusting for seasonal swings, from 449 at the end of last year, Statistics Danmark said today. More companies went out of business in January than in any month since November 2010, official data show.
“As feared, it looks like the setback in Denmark’s economy is leaving its depressing mark on businesses,” Jes Asmussen, Svenska Handelsbanken AB’s chief economist in Copenhagen, said in a note.
Stagnant Economy
Annual retail sales fell for the fourth consecutive month in December while gross domestic product, which contracted in the third quarter, probably stagnated in the final three months of 2011, the confederation’s Chief Economist Klaus Rasmussen estimates.
Twin banking and housing crises have so far made little impression on investors in Denmark’s AAA rated government bonds, thanks to the country’s low debt ratio. State debt will stay within Europe’s 60 percent rule and be only 44.6 percent of gross domestic product in 2012, compared with an average of 90.4 percent in the euro area, the European Commission said Nov. 10.
Denmark’s government pays about six basis points less than Germany to borrow for 10 years, with the benchmark 2021 note yielding 1.87 percent at the end of last week.
Still, Denmark’s debt load has widened every year since 2007, unlike neighboring Sweden’s, where debt relative to GDP has narrowed every year since 2009 and will shrink again in 2013. Denmark has the highest household debt load in the world, at 310 percent of disposable incomes, Exane BNP Paribas estimates.
Banks Overreacting
Dybvad said banks are overreacting to the FSA’s stricter standards and preventing businesses from contributing to an economic recovery by denying them credit.
“The banks need to be more open, to study things in detail and to be careful before they just cancel credit lines,” he said. “Bank regulation must not be enforced as strongly and as fast as some proposals.”
European banks also face tougher capital requirements that threaten to curb lending to businesses and slow growth. European trade groups in January issued a joint letter to lawmakers urging them to take more time to overhaul bank regulations.
“If global financial conditions were to deteriorate further, leading to liquidity shortages, banks might restrict lending to the corporate sector,” the OECD said in its report on Denmark last month. “This would make it especially difficult for small and medium-sized enterprises, which already face stricter lending conditions, to access funding and would depress growth even further.”
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