Monday 29 December 2014

We can learn a lot from how Denmark handled its crash

Published 01/05/2014 | 02:30

Denmark handled its banking collapse differently to us
Denmark handled its banking collapse differently to us

JUSTICE is not only supposed to be blind, she is supposed to be unemotional. So it proved in the 'trial of the decade' involving the three former senior executives of Anglo Irish Bank.

Some analysts have suggested that there was more to the surprisingly muted public reaction than just the deadening hand of judicial proceedings. They surmise that people have replaced anger with a more general understanding of the complex processes which led to the collapse of Anglo and the near-collapse of the entire banking system.

There may be something in that but it probably also has a lot to do with the passage of time and even the feeling that the worst is over. The level of residual anger may well depend on the size of an individual's losses from the crash – whether income, employment or family – and that varies a lot from person to person.

In December 2008, the Government had announced a €10bn recapitalisation of the banking system, after studies by PricewaterhouseCoopers and Merrill Lynch. We now know that this was a laughable fraction of what the banks really needed but it hardly got a chance to calm things down.

The reminder of the loans' significance came from a new book about the international financial crash by Cornelia Woll, professor of political science at Science Po Paris. She hit on the idea of comparing how similar countries dealt with their banking crises, to see if any general lessons could be learnt.

Countries are similar in different ways. The US and UK are paired together in the book because of their comparable financial systems. Ireland and Denmark are chosen because they are small, open economies with large banking sectors.

But what the book shows is how very different they really are.

With a population not much larger than the Irish Republic, Denmark had almost 140 banks at the start of the crisis. Even that was 100 fewer than before the general Nordic banking crisis of the late 1980s.

This, to us, puzzling plethora of banks is a common feature of continental countries. A large number gives more options for closures and mergers in a crisis than having just a few institutions, all of them "too big to fail".

It is worth remembering that the collapse of Barings after Nick Gleeson's rogue trading was the first major failure in Britain or Ireland for more than a century. This is quite unlike the banking history of the USA or several European countries.

Everybody, including the Danes, baulked at the idea of a large bank going down but it may have been even more outside the political imagination of Irish – or indeed British – governments.

Even so, the Irish response does not come well out of Dr Woll's analysis.

"While the Irish Government was torn between denial and panic, the Danish government negotiated a sector-wide rescue scheme based on substantial participation by the financial industry," she writes.

The big surprise for an Irish reader may be the scale of the Danish crisis. The OECD calculated that the house price bubble was bigger in Denmark than in Ireland. The fall in prices was bigger and the trading sector suffered more.

The Danes guaranteed bank deposits and unsecured debt a week before the famous Irish guarantee. During the collapse, a dozen banks failed, including some of the largest. They famously burned some senior bondholders but reversed engines when they saw the panicky market reaction.

Despite all this, Woll notes, Ireland has received a lot of more international attention than Denmark, but that does not surprise me – not since a visit to Tokyo, when I saw the English-language edition of the 'Asahi Shimbun' carry a large picture of a small riot in south Belfast. Whatever the reasons, we get far more attention than we warrant, which then tends to make us exaggerate our own importance.

The most obvious difference is that Denmark is not in the euro, although it keeps the kroner closely tied to the single currency. This meant the Danes had more freedom of action, although they chose not to seek a major devaluation of the kind which several Irish economists wished we could have adopted.

But it also meant there was a limit to the amount of emergency lending which the Danish central bank could provide. As with the Irish Central Bank in the 1992 currency crisis, it could run out of resources, whereas the ECB had no difficulty providing emergency funding, which at one point exceeded Irish GDP.

What one does depends on the circumstances in which one find oneself. It would have been bizarre for the Irish Government to refuse ECB funds and see the pillar banks go down. But that meant accepting the ECB's terms, however unfair ministers perceived them to be.

Even Denmark had its European problems, with the European Commission complaining that a fund to guarantee deposits breached EU state aid rules. There are few follies greater than those of bureaucrats clinging to their briefs as the world they have known collapses around them. There was quite a bit of that from Brussels.

The main difference which Woll highlights – the participation of the banks as a group – has much deeper roots. It goes back centuries to the strong collective tradition of the Nordic countries. The Danish banks negotiated with the government as to what should be done and how much they should pay.

She finds it strange that the Irish banks were not even involved in the decision to offer a guarantee – although they had asked for something similar earlier on. Perhaps the strangest thing is that very few Irish people find it strange.

On the contrary, negotiating openly with the banks on the terms of their rescue would have been even more politically toxic.

Woll's somewhat unexpected conclusion, however, is that banks contributed more to their own rescue in situations when they were involved in such negotiations. Where they could sit on the sidelines, they could also keep governments in the dark about the true state of affairs – as they certainly did in Ireland.

Having been allowed to do what they liked by a complicit government and cowed and incompetent regulators, the banks were then told what they must do by ministers who were ill-informed and ill-prepared for the decisions they had taken.

A shrewd and witty Irish economist once remarked that to operate the Danish model, one must have Danes. It would be foolish to try to fit Irish history and attitudes into the Nordic way but it must be possible to create a better Irish model than the one on display in this book and, one fears, elsewhere.

Indo Business

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