'Historic Fight' with the EU

We have previously discussed Denmark's unique mortgage credit bubble (see 'Scandinavian Sorrows' and 'Danish Sorrows' for a detailed overview). In brief: household debt in Denmark is at 310% of GDP, a world record. A large part of this consists of mortgage debt. Per capita and relative to GDP, Denmark boasts the largest mortgage credit market in the world.

Why is it a problem? It is not only the sheer overwhelming size of the debtberg that gives cause for worries. As we pointed out, the governor of Denmark's central bank, Lars Rhode, has the serenity of a true Zen master. While his central bank has been instrumental in creating an explosion in Denmark's money supply by at one point imposing negative interest rates to keep the currency from appreciating (sounds familiar), he isn't worried at all about the debtberg of Denmark's households. He reckons that the mountain of debt is balanced by large pension assets and a strong social safety net, whereby the latter has some latitude due to Denmark's low public-debt-to-GDP ratio.

 

Of course what he ignores is that the value of assets is often ephemeral, something that cannot be said of the size of the debt, which doesn't change in the event of falling asset prices. Also, the governments of Spain and Ireland had very low public-debt-to-GDP ratios as well before the crisis motivated them to engage in serial bailouts while their tax revenues collapsed concurrently.

Let us say though that Rhode has a point regarding this balance. That still leaves a problem. Not only have real estate prices begun to fall (there was a big bubble in prices as well of course), but the funding arrangements of Denmark's mortgage credit market look decidedly unsafe. A lot of what is really very long-term debt is funded with bonds of a duration of just one year.

This is why the EU has now begun to put pressure on Denmark's government to alter the rules. It probably fears that the whole debt edifice could topple if short term funding dries up during a crisis. New EU regulations demand that banks must have stable funding of long-term obligations, and one-year bonds probably don't really qualify. However, no-one ever interfered with Denmark's mortgage market before, and it has worked quite well up until now. It seems likely that intervention will lead to unintended consequences. This is a general principle one must always keep in mind.

According to Bloomberg:

 

“Denmark is bracing itself for an historic showdown with the European Union as lawmakers in the Nordic country settle on a definition of stable funding for mortgage banks that Brussels has yet to accept.

For the first time in the history of Denmark’s two-century-old mortgage bond market, lawmakers proposed last week adding a trigger to extend maturities on one-year notes at risk of failing to meet stable funding requirements. Never before have investors in the $530 billion market for Danish mortgage bonds faced government intervention in securities funding existing loans, according to the Danish Mortgage Bankers’ Federation.

The government in Copenhagen now needs to convince European regulators the new maturity profile satisfies stable funding rules intended to protect against market freezes. The Danish Financial Supervisory Authority, which deems funding shorter than 12 months as unstable for commercial banks, says the EU should accept the new mortgage bonds. Denmark is waiting for a response from Brussels as lawmakers, led by Economy Minister Margrethe Vestager, say they’re willing to do whatever it takes to save the world’s biggest mortgage market per capita.

“The Danish FSA’s position in the future EU development of the Net Stable Funding Ratio is that the new one-year mortgage bonds should be considered as stable funding,” Kristian Vie Madsen, the FSA’s deputy director general, said in an e-mailed response to questions on Nov. 8.

Standard & Poor’s, which warned in July that a failure to reduce issuance of one-year bonds could lead to downgrades, said it is looking at the proposal. Moody’s Investors Service, which has also criticized Denmark’s short-term mortgage bonds for introducing refinancing risks, is analyzing the proposal, it said last week. Investors still need time to decide what the changes mean, according to Pacific Investment Management Co. “We are evaluating this development,” said Kristion Mierau, senior vice president for portfolio management at the Munich office of Pimco, the world’s largest bond fund.

Without European approval, banks in Denmark will have to slash sales of mortgages with rates that are reset annually. The one-year bonds make up about 40 percent of the market, comprising the single biggest category of mortgages.”

 

(emphasis added)

Adding a 'trigger' to one year bonds means mainly that they actually won't change the current financing model, except under duress. Here is what the trigger feature entails:

 

“Under the proposed legislation, an auction failure or interest rate increase of more than 5 percentage points would trigger conversion of one-year, three-year and five-year mortgage bonds, including index-linked notes, into callable, fixed-rate bonds with a maturity matching the underlying loans. That can be as long as 30 years, minus the maturity of the original loan. Yields would be set at the coupon plus 5 percentage points.”

 

 


 

Denmark house pricesSingle family house prices in Denmark since 1994: the bubble has burst.

 


 

'Stable Funding' vs. Mortgage Costs

A number of important aspects of the debate are revealed in the excerpt below. We get the feeling that the new 'trigger feature' could well end up setting the very crisis in motion it is designed to avert:

 

“At Danske Bank A/S, chief bond analyst Jens Peter Soerensen said Denmark’s proposal “might be stretching the interpretation of the net stable funding ratio a bit far, but this is dependent on the interpretation of the local FSA, and so far they seem positive. I don’t think the EU would comment on a specific Danish mortgage bond and say that’s not stable funding.”

The FSA may still limit use of the extended maturity one-year bonds when it introduces new guidelines for mortgage bond issuance, recommended earlier this year by a government-appointed committee examining the roots of Denmark’s financial crisis. Madsen at the FSA said the Copenhagen-based agency will unveil its recommendations in the first half of next year.

“We fear there will be a run on one-year bonds, and that’s why we’re emphasizing that it’s still important to have a focus” on the volume,Karsten Beltoft, head of the Mortgage Bankers’ Federation, said in an interview. The greater the volume of one-year bonds, the more likely it is that the maturity option would have to be exercised, he said.

 

Though banks had tried to wean borrowers off one-year funding, households resisted those efforts after rates in AAA-rated Denmark sank to record lows. That helped cushion the blow to homeowners of a 20 percent slump in property prices since their 2007 peak.

Yields on one-year mortgage bonds may be as low as 0.55 percent in auctions this month to refinance loans with a Jan. 1 interest reset date, according to Christian Heinig, chief economist at Realkredit Danmark A/S.

“The FSA will fight for the new one-year constructions as being compliant,” said Soeren Holm, chief financial officer for Copenhagen-based Nykredit Realkredit A/S, Europe’s largest issuer of covered bonds backed by home loans.

“This really eliminates the refinancing risk and reduces the interest rate risk for the customer,” Holm said. “We expected it to be at a reasonable price, 5 to 10 basis points.”

 

(emphasis added)

So on the one hand, a 'run on one year bonds' is feared, but on the other hand it is quite clear why Denmark's government is so eager to keep these bonds going. For mortgage debtors they currently guarantee extremely low interest rates, due to the central bank's de facto ZIRP. Of course frequent refinancing with one year debt harbors great risks for debtors should interest rates ever rise again.

On the other hand, once the bonds are enhanced with the new 'trigger' feature, sticker shock could come a lot earlier than that, namely if there really is a run on the one year bonds. Investors may well get worried about this trigger feature, since they are currently buying short term debt, which henceforth harbors the danger of suddenly being converted to long term debt. A great many mortgages may be reset to higher rates if bond maturities are extended to match the maturities of the underlying loans.

It is therefore not at all clear that this new feature will really 'remove the refinancing risk'. It may reintroduce risks, by a different  avenue. For instance, if there really are many conversions forcing debtors to pay much higher rates, mortgage defaults may spike, especially in light of the decline in property prices. Banks would then be faced with unexpected losses, which could balloon if foreclosures pressure property prices further. If that were to happen, refinancing would definitely become more difficult, as investors would no longer fully trust the banks to be able to honor their commitments.

 

Conclusion:

The Danish credit bubble remains a powder keg.

 


 

Denmark house prices-changeDanish house prices, year-on-year change, nominal and real.

 


 

Addendum: Iceland vs. Ireland

As a brief addendum to our recent article on Iceland's currency devaluation and capital controls (“Iceland – the Dark Side of Devaluation”), we want to point readers to a very interesting article by David Howden posted at Mises.org, which compares the inflationary recession in Iceland with the 'internal devaluation' of Ireland (“Inflation Has Not Cured Iceland's Economic Woes”).

As this article shows clearly, inflation merely masks the utter misery the average Icelandic citizen is facing. On the surface, Iceland's performance looks much better than Ireland's. But looking a bit more closely, by taking a peek beyond the veil of the aggregated data so to speak, it turns out that Icelanders are really far worse off than even the much imposed upon citizens of Ireland. The vaunted 'recovery' miracle of Iceland is really nothing but an inflationary Potemkin village.

 

 

 

Charts by Globalpropertyguide.com


 

 
 

Emigrate While You Can... Learn More

 

results 

Year-End Fund Raising Drive

Dear readers, our year-end funding drive has become a “beginning of the year funding drive” as we have yet to reach our target. By now you will be familiar with the many advantages a donation can secure for you, which range from sounder sleep, to children including you in their songs, to potentially obtaining privileges in the afterlife (no guarantees, but it seems highly likely). Lastly, a special thanks to all readers who have already made a contribution, we are greatly honored by your support.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “Denmark Fights For Its Credit Bubble”

  • AussieRodd:

    Household Debt at over 310% of GDP, I find that number truly breathtaking. Down here in Australia Mortgage Debt is around 100% of GDP and most people seem to be leveraged to the eyeballs. It is truly amazing how long these bubbles have persisted.
    You would be well served to write a piece on the madness in Australia. Investors make up most of the activity and the usual story about constricted supply is run in real estate dependent newspapers everyday. We have a concept down here called negative gearing I could explain it but you may not believe me.
    To make matters worse the whole edifice is supported by two mortgage insurers Genworth and QBE who collectively hold just a few billion in capital to support a insured market of over $500 billion. I fear the day when US interest rates rise and the whole high yield carry trade destroys our financial system.

    • jimmyjames:

      We have a concept down here called negative gearing I could explain it but you may not believe me.

      *********

      I don’t think negative gearing is exclusive to any country.. leverage always works two ways.. “negative gearing” is what exposed our “system” to be the fraud that it is-

    • Hi Rodd,

      thanks for providing some color on Australia – I wasn’t aware of the two mortgage insurers for instance, so this information will help me to write something useful on the topic. Imo mortgage insurance is a major pillar of the growth in real estate bubbles around the world, and it is an extremely dangerous feature. As to the negative amortization loans, I was aware of those actually and agree they are utterly crazy.
      Anyway I am resolved to tackle Australia soon.

      cheers, PT

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • goldmine-700x360Gold and Gold Stocks – A Meaningful Reversal?
      A Negated Breakdown There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.   Photo via genius.com We suspect that in it was...
  • 1790_AssignatInflation-Spewing Dragon
      Dovish Cooing from the Desolation of Draghi As Reuters informs us, on the heels of Mr. Draghi's somewhat “disappointing” attempt to assassinate the euro on occasion of the previous ECB meeting, the chief European printing press supervisor and certified monetary crank has decided to assure everyone of his ultra-dovish stance again on Thursday, by announcing that even more monetary insanity must be expected soon:   “Fading growth and inflation prospects will force the European...
  • sauvequipeutThe Bank of Japan – Ringing in the Endgame?
      Let's Do More of What Doesn't Work It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don't work. It is regarded as evidence that there hasn't been enough spending and printing yet.   BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I'm seeing? Photo credit: Yuya Shino / Reuters   At the...
  • The Lost Ice CubeAn Ice Cube for Gulliver
      Panic! 9,000 Billion Tons of Ice Lost in Greenland! Have you ever wondered why they called that place up north “Greenland” instead of, say, “Whiteland”? The reason is that at the time humans first moved there, much of the place was in fact green....as it was a lot warmer than it is today, when allegedly, we are shortly all going to be roasted due to global warming (those living in coastal ares are supposed to drown before they have a chance to burn for their carbon footprint...
  • eyes-1The FOMC Decision: The Boxed in Fed
      An Imaginary Bogeyman What's a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory? In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the...
  • To Hell in a HandbasketTo Hell in a Handcart
      $5 Trillion up in Smoke POITOU, France – Pessimism is a sin against God, said money manager Charles Gave. It suggests ingratitude. And a lack of faith. After all, this is God’s world. What, not good enough for you? That’s why we are always optimistic at the Diary. Things don’t always go the way we would like, but they always go the way they should. Yes, the world may be headed to Hell in a handcart… but it’s for its own damned good!   Mild surprise down in hell...
  • hollandeHollande's Socialist Wonderland
      Everything's an Emergency If memory serves, France remains in a state of emergency on account of the terror attack in Paris in last November. As terrible as terror attacks are, they are a statistically insignificant cause of death and injury in developed nations. It is also worth noting that the countries that seem most prone to suffering terror attacks are the ones that are most active in intervening militarily in foreign countries. This is probably no coincidence. Just...
  • Super-Tall ScrapersSkyscraper Mania Goes Global
      New Skyscrapers Wherever one Looks Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom...
  • MW-BX052_FOMC_m_MG_20140319160153The End Is Nigh for the Fed’s “Bubble Epoch”
      Market Mythology LONDON – Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!   The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the...
  • Pile-of-CashSoftening up the Rubes – the War on Cash Continues
      More Anti-Cash Propaganda by Bloomberg Former NYC mayor Bloomberg is probably one of the worst nannycrats who ever strode upon the US political scene. No-one has done more to take the fun out of New York than this man (we have chronicled the efforts of people of his ilk in “America's Killjoys”). It always amazes us to no end when successful businessmen - once they have made enough money to last them a thousand lifetimes – suddenly discover their penchant for socialism and State...

Support Acting Man

350x200

Archive

j9TJzzN

Own physical gold and silver outside a bank

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com