When one things of Europe's default contagion, one traditionally thinks of the Club Ded countries along the Mediterranean. It may be time to change that after Denmark's CDS has surged by nearly 20% overnight, from 74 to 88, and by over a third since June 7, making it the worst performing government in the past month. The reason for this is that the country, which unlike other European nations, has allowed its insolvent banks to actually fail without masking their poor state. This in turn prompted S&P to come out with a report yesterday that as many as 15 more banks could default. In its report, S&P said that "In our base-case assumption, we estimate the gross loss due to additional bank failures to be Danish krona (DKK) 6 billion-DKK12 billion over a given three-year period. If the losses are larger than we expect, we would have to reassess our ratings on individual Danish banks, based on the impact of the fallout on each. Eleven banks have failed in Denmark since 2008. Although the banks were small by international standards, it is nevertheless an unusually high number for a developed market where bank defaults are generally rare events and extraordinary government support mostly averts losses to senior creditors. While the Danish regulatory authorities accept the concept of systemically important institutions, they have so far given no formal indication of which institutions fall under this definition. In our opinion, the banks we rate would be considered systemically important and therefore may receive extraordinary government support, beyond that defined in the country's established bank resolution scheme." So according to the rating agency any country that dares to avoid the Paulson-Summers TBTF doctrine is in prompt need of annihilation if we read this right. Either way, this latest black swan means that the crisis is creeping ever closer to German, which now has to fund two insolvency fronts: a southern and a north one. And when S&P finally puts France on downgrade review, the time to panic will have come and gone.
More soothing words out of S&P:
Government Support Averts Collapse Of The Danish Banking Market
Prices rose substantially in the commercial real estate and agriculture sectors prior to the outbreak of the recent global financial crisis. The crisis sharply raised banks' funding costs, particularly for small local and regional banks that had been financing the 2005-2007 property boom. As a consequence of this sharp increase in funding costs in 2007, Danish property prices began to fall and as the international financial crisis deepened in 2008, international funding markets closed for small local and regional banks in Denmark.
The government subsequently avoided a collapse of the Danish banking market through its support of both funding and capital. At year-end 2010, 50 financial institutions in Denmark had DKK193 billion in government-guaranteed debt outstanding. Currently property prices are not in freefall (see charts 1 and 2), but there are nevertheless lingering asset quality problems among the smaller Danish banks that are substantial enough to threaten the survival of several.
In addition, a limited number of banks have become highly dependent on government-guaranteed funding and may face refinancing problems as existing government-guaranteed debt matures in 2012-2013. In our view, while asset quality problems remain the primary likely cause of further bank failures, refinancing risk could also be a contributory factor.
A chart summarizing the recent trends in Denmark's paltry banking sector
And a list of the 12 banks that have failed to date: