Contagion Spreads To Sleepy Denmark, As CDS Surges By 20% Overnight

Tyler Durden's picture

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:

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magpie's picture

Krona is pegged to the Euro FYI

Dagny Taggart's picture

At first glance, I thought it was odd to see a beer pegged to a currency lol. It's no more absurd than using soccer players for collateral.

oogs66's picture

this bailout lasted less than a week.  since last thursday's big news, no new details and no real progress

EscapeKey's picture

Danske Bank received substantial aid a few years back. TBTF is very much in play in Denmark as well.

ever closer to German, which now has to fund two insolvency fronts

Whoa, there. Although running a deficit, the public sector debt/GDP ratio is not bad in Denmark, and the housing bubble has deflated to an extent. Denmark is most certainly not anywhere near the same category as Club Med - in fact, 88 bps is probably not far off the UK or US.

i-dog's picture

"88 bps is probably not far off the UK or US"

Oh, that's all right then ... 'cos we know the UK and US are in great shape. Phew!!

GeneMarchbanks's picture

Hans Christian Andersen tales slowly turn into Fear and Trembling.

Gohn Galt's picture

Not slowly turning into fear.  I was there at the beginning in the early 90's meeting with their Ministers. The fear of Germany and Banker's was very much alive.  And now the fears are very real.  The Minister's didn't want this, the Danish people didn't want this.  We were all powerless stop it, I was surprised they were able to keep their currency.  Sorry Denmark.

writingsonthewall's picture

The hull has been breached captain! - check out the new low.;rang...


Sorry I'm late - got here as soon as I could!


Where does it go from here?


Regardless of the resolution on debt - this suckers going down...

THE DORK OF CORK's picture

The evil eye has cast its dark gaze on the last of the hobbit countries.

THE DORK OF CORK's picture

The orcs will scour every Shire.

NuYawkFrankie's picture

Why not just change the name "Zero Hedge" to either:

1) All Boaner - all the freekin time.


2) CDS Contagion.... get your CDS Contagion here!

I'm afraid you'll have to do better than this if you want to kep my patronage.

Get a grip!

Toolshed's picture

Yes.........well, I am sure the ZH guys stay up all night scheming and formulating plans to maintain your "patronage."


Terminus C's picture

I was thinking much the same.  Sounds like Nu's a gov't bot.

Tao 4 the Show's picture

Getting close to strongman Germany, which has more vulnerability than most care to admit.

BTW, can anyone tell me if there is a way to message/email ZH posters?

BobPaulson's picture

If there is, let me know so I can cancel my account.

Bob's picture

Anybody still wonder whose back the "rating agencies" have?!

First they play a fundamental role in bringing about the conditions that put TBTF into play, and now they make threats against those who don't play along.

Thorlyx's picture

Hitler found out that a 2 front war is a toughie. With France in the west, Merkel will then have it 3 ways. Airtight.

Mec-sick-o's picture

Kein Problem.

Just avoid the French defence barrier and do the Blitz overrun to Brussels (European Union capital) to take Europe.

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