Credit squeeze forces Denmark into action on banks

COPENHAGEN (Reuters) - Denmark said it would clean up its banks and consider guarantees for foreign lenders, after worries about more banking failures prompted international funding markets to freeze out many of its lenders.

Danske Bank, which still has access to the markets, told Reuters on Friday it would raise its lending rates due partly to higher funding costs.

Jittery investors are scrutinising Europe for signs of another Greece-style debt overload. The latest Danish bank collapse last week -- the ninth since the start of the financial crisis -- has sparked worries about how far the rot has spread.

After declining more or less steadily since mid-April, yields on Danish government bonds jumped this week. The yield on the 10-year benchmark government bond has risen to 3.237 percent from 2.876 percent at the end of last week as concerns over Denmark's banks have risen.

"Over the summer we shall come up with a concrete structure that will make it possible for healthy banks to take over banks in need," Economics and Business Affairs Minister Brian Mikkelsen told Reuters on Friday.

"The finance sector must clean up after itself," he said.

Earlier on Friday Moody's downgraded ratings of three Danish mortgage lenders, Nykredit Realkredit, DLR Kredit and BRF Kredit, as well as of Nykredit Bank. It said the sector faced tougher funding conditions as the government had made it clear it was unwilling to bear losses for bank failures.

Moody's senior analyst Oscar Heemskerk said Danish banks needed to refinance 116 billion Danish crowns ($22.6 billion) in government-guaranteed funding, and that would only happen at higher interest rates.

"We think investors will be looking at the Danish banking sector in general with more scrutiny, not just the smaller banks that are more vulnerable but also the whole sector."

Mikkelsen said he had not ruled out government aid to the country's banks.

"I will not reject that a state guarantee could be an option, but there will be no more taxpayers' money in the finance sector," Mikkelsen also said.

Danske Bank raised its lending rates for private and corporate customers by up to 0.5 percentage points from August 1 and said international funding markets had turned their backs on most of its compatriots.

"As it is in Denmark today, under a handful of Danish banks can go out and fund themselves internationally. We are one of those who can," said Tonny Thierry Andersen, head of Danske's banking activities in Denmark.

"There is for a large number of banks, small and mid-sized, a freeze on funding access internationally," he told Reuters.

Andersen said the refinancing of government-guaranteed funding next year posed a huge challenge.

"If you are a smaller bank that needs to go out and borrow internationally, you will face a headwind. And for those who have the possibility ... you will have to pay extra," he said.

"There is a mountain of funding that needs to be in place before the first quarter of 2013 ... You remove the life support to the patient if a solution is not found."

Local bank Fjordbank Mors became the ninth Danish bank to be taken over by administrators, saying it could not meet regulators' demands for increased solvency. That followed the collapse in February of Amagerbanken.

The government's previous aid package to the banks expired at the end of September last year. It had offered a two-year unlimited guarantee to lenders.

Moody's said the refinancing risk associated with Danish covered bond programmes containing adjustable-rate mortgages had risen, and that had increased the minimum collateral needed to maintain current ratings.

Moody's added, however, that Denmark still had one of the strongest covered bond frameworks in Europe and the likelihood of timely payments on covered bonds following an issuer default remained high.

Denmark's gross government debt last year was 44 percent of gross domestic product (GDP), well below 80 percent for the European Union as a whole, according to Danish government figures. Although the global crisis has forced the government into running deficits, its budget deficit was only 2.7 percent of GDP last year, while the EU average was 6.4 percent.

(Additional reporting by John Acher; Writing by Sophie Walker; editing by Alexander Smith and Will Waterman)

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