Danish banker defends burning bondholders

A GOVERNOR of the Danish central bank has said it should be within the powers of the authorities in the euro zone to impose losses on senior bank creditors, a policy pursued by non-euro Denmark but resisted in the single currency area by the European Central Bank.

Denmark allowed two small banks to fail last year, imposing losses on senior bondholders and uninsured depositors in the process.

When Dublin has sought to do the same with unsecured, unguaranteed senior bondholders in the former Anglo Irish Bank, the ECB blocked the move on the basis that it would undermine confidence in debt of weakened euro zone banks generally.

A further €1.25 billion tranche of Anglo debt falls due in a fortnight and the Government plans to repay it in full.

Per Callesen, one of the three governors in Denmark’s central bank, said the failed banks Amagerbanken and Fjordbank Mors were considerably smaller than the Irish institutions and said different solutions may have been required for any large systemic lender.

He acknowledged a contagion impact on other Danish banks last year after the failure of Amagerbanken and Fjordbank Mors and the losses imposed on their senior creditors but said that dissipated after a while.

Saying the debate in the euro zone on these questions may be “too black and white”, he said it was feasible to take similar measures in the euro zone and added that such interventions were common in the US.

“We took the step in two cases last year. That’s not the only approach we have to bank resolution but it’s one of them. If there’s no other solution to be found within the sector that could be done,” he told The Irish Times.

“My interpretation is yes there was contagion that was in part due to uncertainty about [whether this was] a permanent phenomenon or not but also a debate which was completely out of proportion. The two banks we’re talking about – they added up to less than 1 per cent of the Danish market,” he said. “For that to hit the front page of the Financial Times we were quite amazed. I think after a while that was not contributing to the financial problems for other Danish banks, but of course these banks like everyone else in Europe had trouble with refinancing over the autumn and winter here.”

Mr Callesen said “of course it can be done” when asked whether senior creditors could be burned in the euro zone.

He added, however, that it was difficult to draw links between Ireland and Denmark on this question.

“It’s quite difficult to compare the Danish resolution regime with the Irish one because what we dealt with was small banks, very small banks, even in a Danish context,” he said.

“We are a small country, by and large the size of Ireland. They were very small banks. We would probably have needed a different took kit if we had to approach the larger banks, with systemic overall importance to the economy.

“If you’re dealing with very large systemic banks and you experience haircuts there is always the balance towards having the credibility of investors.”

Asked whether it was his position that such a step could be contemplated only in respect of small banks, he said he did not claim that was necessarily so.

“But it is much, much more difficult and I fully understand why in Ireland with the very large banks one had needed different considerations than ours. But I’m not sufficiently aware of the details of the Irish system.”