After a series of financial support packages introduced by the previous government to prop up the banking industry, the Socialdemokraterne–Radikale–Socialistisk Folkeparti (SRSF) government is signalling that it is time for the banking industry to pull itself up by the bootstraps.
“Danish banks are in better shape than their colleagues in other countries,” the finance minister, Bjarne Corydon, told Bloomberg news on Saturday. “We have had four bank bailout packages and now the sector is consolidating.”
Between October 2008 and August 2011, the former Venstre–Konservative (VK) government introduced a series of four, state-funded deals to prop up the banking industry. The final deal, Bankpakke 4, known as a ‘consolidation billÂ’, allowed solvent banks to buy up the healthy assets of failed banks, while letting the government absorb the bad debts.
Bankpakke 4 was passed just two weeks before the September 15 election, which shifted power from the centre-right to the centre-left. One month later, the regional bank Max Bank nearly went bankrupt. Instead Bankpakke 4 enabled a consolidation deal at an estimated cost to taxpayers of four billion kroner; Sparekassen Sjælland, a regional savings and loan, got Max Bank’s good assets, while the state-owned liquidator Finansiel Stabilitet ate up the bad ones.
Max Bank was faulted with having underestimated the riskability of large portions of its portfolio, in particular a number of property loans.
The business and development minister, Ole Sohn, has promised that taxpayers will not be made to pay for more bank bailouts. Last month Sohn said he was working on a bill that would introduce penalties for banks that systematically underestimate the riskiness of their loans.
In July, Standard & Poors warned that as many 15 Danish banks could fail before the economic crisis ends – an end that appears to be receding into the distance.
Analysts from the European Central Bank (ECB) announced last week that the likelihood for another European recession had risen from under ten percent a few months ago to over 50 percent today in light of the Eurozone crisis and lacklustre business returns.
Finansiel Stabilitet’s own chief executive indicated that Denmark had as many as 75 too many regional banks, many with risky farm and property portfolios.
To make matters worse, last month Fitch threatened to lower its AAA credit rating for Danske Bank, the nationÂ’s largest financial institution, citing, among other things, that household debt had risen, while housing prices had continued to fall.
Despite the grim economic indicators, the new government has not shown the same eagerness as its predecessor to prop up the banking industry. Instead, it has emphasised increased spending on social welfare, education and public works in its budget for 2012 and 2013.
The budget, which was released last week and is currently under negotiations to amass the 90 votes needed to pass, sets aside over 18 billion kroner over two years for infrastructure improvements as part of a plan to create jobs and stimulate growth. Corydon told Bloomberg the public works investments were “absolutely necessary” to get the economy moving again.
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