Denmark Will Lend Banks $17.8 Billion to Spur Lending

Denmark Will Lend Banks $17.8 Billion to Spur Lending

Jan. 18 (Bloomberg) -- Denmark will expand its financial rescue package by lending the country’s banks and mortgage institutions 100 billion kroner ($17.8 billion) as the government struggles to avert a protracted recession.

Denmark will lend as much as 75 billion kroner to banks and the rest to mortgage companies at a variable interest rate determined by each company’s financial strength, averaging 10 percent, the Copenhagen-based Ministry for the Economy, said today on its Web site. The previous package had provided government backing for deposits and interbank loans.

Danish banks tightened their lending policy in the fourth quarter and will limit loans further in coming months, the country’s central bank said in a Jan. 13 survey. Denmark’s economy will contract by 2.9 percent, an additional percentage point this year without aid to banks, as lower lending will limit business investments and consumer spending, the Confederation of Danish Industry said on the same day.

“If we don’t act, there’s a considerable risk that even healthy businesses won’t be able to borrow sufficient funds to secure daily operations, jobs and growth,” Finance Minister Lars Loekke Rasmussen said in the statement.

Denmark will also set up a 20 billion-krone fund that will provide loans to the country’s export businesses, to help boost the trade balance, it also said today.

The government has agreed on the terms of the package with all of Denmark’s opposition parties except the Red-Green Alliance, and the proposal can be passed in parliament before the end of the month.

‘Frozen’ Credit Market

The central bank has estimated that Danish banks need to refinance 20 billion kroner of subordinated debt in the period 2009-2010, in a credit market Peter Engberg Jensen, chairman of the Danish Mortgage Bankers Association, has described as “frozen.” Banks would have to reduce loans to consumers and businesses by about 10 times the amount that they fail to refinance, according to Jensen.

Denmark passed its first rescue package on Oct. 10, with banks setting aside 35 billion kroner to cover potential losses, and the state pledging to cover losses that exceed that amount.

Both Jensen and Central Bank Governor Nils Bernstein had urged the government, led by Prime Minister Anders Fogh Rasmussen, to introduce the new package.

All banks and mortgage lenders can apply for the loans. The government will charge “just above” 9 percent interest for loans to “healthy” banks and “just below” 12 percent to the “least healthy,” it said. The loans, which the government will give in the form of hybrid core capital, will run for at least three years.

‘More Muscle’

“This will soften up the situation and give banks more muscle,” Peter Straarup, chief executive officer at Copenhagen- based Danske Bank A/S, said in an interview broadcasted by TV2 News. The bank, Denmark’s biggest, will let its shareholders at its annual general meeting decide whether it will participate in the package.

Denmark’s banks reported a combined profit drop of 76 percent in the third quarter as writedowns on bad loans surged 82-fold, according to the Danish Financial Supervisory Authority.

Last year, 13 lenders were either bailed out by the central bank or bought by rivals. Denmark will lose a quarter of its 140 banks within the next two years, according to a November poll of bank executives published by the Danish financial industry’s union.

The Danish economy is in the middle of a two-year recession, the longest period of decline in two decades, according to estimates by Deutsche Bank AG and Danske. Denmark’s gross domestic product probably fell 0.2 percent last year and will contract 1.4 percent in 2009, according to Deutsche Bank. Danske estimated last week that the economy contracted 0.8 percent last year and will shrink 0.7 percent in 2009.

Danish corporate bankruptcies rose 11 percent to a record in December, while the number of Danish home foreclosures jumped 34 percent in that month, Statistics Denmark said Jan. 7.

BLOOMBERG