Danish government is forcing liquidity crisis

Business

Danish government is forcing liquidity crisis

Close

Banks in Denmark need to refinance about $35 billion in state-guaranteed debt in the next two years

04 August,2011 01:27 pm

The Danish state’s refusal to extend guarantees on bank debt beyond 2013 means even healthy lenders will suffer the fallout of a liquidity squeeze that could be avoided, the head of the Local Bankers Association said.“There’s nothing wrong with helping banks out with their liquidity, it won’t cost the taxpayer,” Bent Naur, the chairman of the Copenhagen-based group, said yesterday in a phone interview. “The state should prolong the guarantee, not for troubled banks, but for those that meet solvency requirements. That will avoid a liquidity squeeze when everybody needs to refinance at the same time.”Banks in Denmark, home to the European Union’s toughest resolution laws, need to refinance about $35 billion in state- guaranteed debt in the next two years. The government has rejected calls to extend its backing, arguing the industry should instead consolidate. Lenders already face higher funding costs as two regional bank failures since February triggered senior creditor losses. Moody’s Investors Service warned in May borrowing costs for Danish lenders will increase “long-term.”“When we look at the calendar, 2013 isn’t far away,” said Naur, whose association represents 88 lenders in Denmark, Greenland and the Faroe Islands. Helping healthy banks access liquidity won’t prop up insolvent lenders, he said.Central bank Governor Nils Bernstein and Financial Supervisory Authority Director General Ulrik Noedgaard have both said lenders shouldn’t expect rescue programs to be extended.