Turbulent Banking Sector

Greek debt problems and concerns about Italian banks contributed to falling stock prices and interes

(27.06.2011) Greek debt problems and concerns about Italian banks contributed to falling stock prices and interest rates and a weaker euro. Also Danish banks faces headwind.

By Kyrre Aamdal, Senior Economist at DNB Markets

U.S. stocks fell for a third day in a row along with 10-year Treasury yields. Concerns about the Italian banking sector and Greece's debt crisis were probably the main movers.

Italian UniCredit and Intesa Sanpaolo dropped significantly at the Milan stock exchange Friday and trading was temporary halted. Speculations that imminent stress test results may highlight capital shortfalls at Italian lenders as well as the Moody's threat to downgrade Italian banks may be reasons behind the sell-off.

Today the Greek Parliament
starts to discuss the recent austerity package demanded by EU, ECB and IMF. The result is not given and Nikkei 225 is down 1 per cent this morning. Friday 10-year Treasury yield fell to 2.87 per cent, a 6 month low. The euro is down 1 per cent versus the USD since Friday morning. The NOK has been quite stable at a high level versus the Euro.
In Denmark fears for a series of bank failures have mounted. Friday Danmark's Fjordbank Mors resorted to the state's bank resolution package after it failed to meet solvency requirements. The state-appointed bank wind-up Financial Stability will take over assets worth 7.8bn DKK and provide liquidity that will serve Forjordbank Mors' customers. All shareholder equity at the bank is likely lost. Deposits up to DKK 750.000 (EUR 100.000) are guaranteed, but excess deposits may be lost.

Fjordbanken Mors is the second Danish bank to trigger a resolution package that allows for senior bondholder losses. In Amagerbanken's Feb. 6 collapse senior bond holders faced a 41 per cent haircut on their holdings.

In its Financial Stability Report (due May 26) the Danish central bank pointed at the funding gap for small to medium-sized banks. "A number of these institutions have to refinance large parts of their balance sheets in the years ahead and should already begin to prepare for the expiry of the government guarantees, which also implies considering their business models" the National Bank said. Furthermore: "For some institutions, the most viable solution will be to trim the balance sheet or to aim for a merger". In the Financial Stability Report the central bank also assed the situation for the Mortgage-Credit Institutions and said that "Since 2008, the number of loans requiring top-up collateral has increased, and the average loan is closer to require top-up collateral".

Last week Moody's rating agency said Mortgage-Credit institution Realkredit Danmark would need to put aside DKK 32.5bn in excess cover to maintain its AAA rating. Realkredit said they fundamentally disagree with Moody's in their view on Danish mortgage bonds and will not longer pay Moody's to provide credit grades. The yield on Realkredit's covered bonds increased substantially Friday and Danske Bank, the owner of Realkredit, experienced a marked decline in stock prices.
Today we present new forecast for interest rates and foreign exchanges as a consequence of the monthly revisions of the forecasts. Except for Norway key policy rate forecasts are unchanged. For Norway we believe Norges Bank will be able stick to its new plan and hike policy rates three times this year and two times the first half of next year. We assume rate hikes at the meetings in August, October, December, March and June.

Long-term swap rates have fallen substantially the last weeks on Greek debt turmoil and weaker macro key figures. We believe at least the latter is temporary and that long-term swap rates will pick up to levels previous forecasted. But the short-term forecasts are adjusted downwards.

For the FX-forecasts the major changes have been to EURCHF. The Swiss Franc has benefited from the European debt unrest and we believe this will continue for a while and has thus adjusted EURCHF downwards. But during the next year we expect EURCHF to increase from the low levels. The SEK has weakened the last weeks and we expect the EURSEK to stay at recent levels for the next three months, before the SEK again appreciate verus the Euro.