One Danish Bank Collapse, Who's Next?

"Danish bank Roskilde Bank said on Friday it had requested and received 750 million Danish crowns ($158 million) in liquidity guarantees from Denmark's central bank, sending its shares down more than 50 percent.

Roskilde said it had realised it would have to take significantly bigger writedowns than expected in real estate loans and had put itself up for sale. The amount of writedowns was not disclosed.

The central bank said it consulted with the government, the Danish Financial Supervisory Authority and the Danish Bankers' Associations to get their support before offering the guarantee."

Danish bank are now being hit...it doesn't come at a surprise, after all their housing market is one that show the biggest bubble characteristics.

Now in Finland, let's not forget that Sampo an ex-Finnish bank has been bought by Danske Bank. Most probably a move that was required in order to absorbs more savings basically more capital...or would it be the next one to fall??

I would not be surprised to see a Finnish Bank or two, sometime next year to fall, a small one, maybe Aktia, Tapiola or others...You have to understand that the housing market should have slowdown or even fallen in 2003 but instead it carried its way up thanks to an exceptionnaly low interest rates or let's call an amazingly high policy central bank mistake.

Now, one need to sort out this mess. it's automatic with free markets through its boom and bust cycles..but this time we are seeing a lot more interventionism, especially in the US : Institution Bail-out, tax rebate etc ... the consequence are therefore unknown, the "wizards" are experimenting in an unknown field in a similar situation as the one passes the knot: for the best or the worse...

It's worth to note that U.K. "Nothern Rock" bank was nationalized after depositor run last year, it's now the turn of IndyMac BanCorp, a mortgage lender that is being taken over, today, by the U.S. regulators after a similar bank run. So the financial crisis that started last year seem to show no sign of abating, on the contrary it seems to get worse and out of control....

"U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history"

Alea iacta est

Consumers are still borrowing for housing purchase, and so are the banks opening the coffers wide open. No sign whatsoever of a credit slowdown which seems to be in sharp contradiction with the consumer confidence survey.

"The amount of housing loans raised increased further in May

In May 2008, households raised new housing loans to a total value of EUR 2.3 billion compared to EUR 2.1 billion in April. The average interest rate on new housing loans was 5.00% in May, up 0.12 percentage point on April. " Bank Of Finland

At the end, this wall of money flooding the consumer space is pushing prices higher in all fields. Inflation is outrageously high, shops are passing cost to the consumers (let's call them "lamb"). Indeed lambs are purchasing without questionning excessive prices set by retailers such as electronics (com'on lambs, purchase online from German shops, it will save you hundreds of bucks) and food. Indeed Finland is where you find the most expensive ... well you name it.

Hidden cartels, Financial regulators asleep and lack of competitions (or municipalities pressures not to have such thing and let some "families" or business group to rip thousands of profit on the back of the "lambs") are making this economy unprepared for what could be the worse economical storm since 1990...

"Finns and Danes share the dubious honour of having to pay the most for their consumer electronics in the EU, according to data released by Statistics Finland on Tuesday."

"Finnish food prices are among the highest in Europe at double those in Germany, Finnish regional daily Aamulehti reported Friday."

Talking about Sleepy Financial regulators, how many time warning were raise in this blog, concerning easy credit, especially Flash credit (or obtained through mobile SMS). The regulator have only spoken but not acted...therefore have been completely useless if not uncompetent....

"Veli-Pekka needed cash in a hurry to pay off gambling debts. So he started texting.

The Zamboni ice-resurfacing machine driver used his mobile phone to contact Finland's text-message lenders. The only catch was he had to pay fees equivalent to an annual interest rate of as much as 1,600 percent."


Since banks open wide open coffers at a time of unprecedented credit crisis in the US (the worse since the 30's), and with Europe at the brink of a recession, Finnish economy continue blindly to ignore the impact it will have. Commercial realestate are mushrooming all around the places, same for Shopping malls, so no wonder why construction cost doesn't fall...

"Building costs rose by 4.5 per cent from June 2007 to June 2008. Labour costs in construction went up by 4.4 per cent, prices of materials by 4.1 per cent and those of other inputs by 5.8 per cent year-on-year."

A sharp contrast with Spain, Ireland and U.K. where salaries in the contruction sector have been slashed by more than 10%, while the number of layoff in this sectors is the amount of hundreds of thousands...

Never mind, signal are gathering pace. The economy is now sharply slowing down, no doubt about it....

"According to Statistics Finland, the volume of new orders in manufacturing was 23.2 per cent lower in May 2008 than in May 2007. In the January to May period, new orders in manufacturing decreased by 2.4 per cent year-on-year."


The problem with that, is the Finnish economy should have had higher interest rates much earlier and even now they are too low. The economy should have been allowed to slow in order to allow comsumer deleveraging few years ago. Instead you have massive indebtedness....

"Households' financial position remained in deficit in 2007. Debts continued to grow briskly and indebtedness, i.e. proportion of loans relative to disposable income, rose to 103 per cent. Debts went up by EUR 9 billion during the year." Statistics Finland

So what to think about all that? well 2009 is going to be a very hard time for the Finish households ...and the economy. Should unemployement rates increase, the effect will be devastating.

Quite many companies have already deserted the Finnish housing market and heading to places where growth has not yet fallen from a cliff...

" Sponda aims to finance the company's growth in Russia by selling some of its property in Finland."

Housing prices will go lower no doubt about it, by a mere few percent (5-6%) next year unless the worst happen..the economy slow much more than anticipated and unemployement pick up much more than Bank of Finland models are telling us...a dark reminder of 1989...

...the dice has been thrown....

Consumers Confidence: Gloomy View on Borrowing and Economy

"In June, consumers' expectations concerning Finland's economy were the gloomiest since the end of 1990.

At the same time their assessments about their own economic situation were also the most cautious since summer 1997.

Nevertheless, consumers continued to regard their own employment prospects and saving possibilities as good. June was NOT regarded a favourable time for making major purchases or for raising a loan, in particular.

In addition, inflation was predicted to continue accelerating clearly."

Let's look at some major index component :

1- Favourable time to raise a loan at present (index) :
20.4(average since 95) 42.0(max) -20.8(min) -5.8 (May) -20.8 (June)

From the index, it's very interesting to note the sharp deterioration for raising loan in June. I think its the record since the statistics started in 1995.

This is not the typical slowdown witnessed in 2003, but it's a much more serious. You wonder how the consumers, this time, will support the economy by taking huge debt.

This support has vanished. Small banks will struggle if not collapse in the year to come.

Merger and acquisition will accelerate in that area (the targeted one : Noa, Tapiola, Aktia, etc.. ). They will not survive surging funding cost and a faltering consumer loan demand at a time when the ECB cannot reduce interest rates.


2- Finland's economic situation in 12 months time :
5.2 (average) 21.7 (max) -17.0 (min) -14.3 (May) -17.0 (June)

Again the same story ,a record low for the Finnish view on the economy. Although one has to be cautious in those kind of figure.

The reality on the ground seems completely different. For example, try to book a Holiday abroad, we will see that almost all destination from any travel agency have all been booked.

Same apply for restaurants, they are all packed, people even queuing to get a place. I'm not even talking about the number of SUV appearing every day on the road (looks like a petrol at 140$ is not high enough to change people habit, or make them more "green": they are not whatever nonsense reports that are spread in the wire time to time. Commercial or Materialistic values still dominate today's world, older and more noble values are all but vanishing bit by bit...)

It might be the type of data you have at the end of the cycle, lots of contradiction , up and down, lots of confusion: signaling the end of the boom.

Have a look in the technical analysis done last February, the gloomy scenario seems to show its head, but too early to say... : consumer confidence technical analysis

Finnish Wood Industry to Be Bailed Out by Tax Payers

"Minister for Foreign Trade and Development Paavo Väyrynen says a possible solution in the timber tariff dispute with Russia is the Finnish state reimbursing companies for their losses and then recouping these funds by tolling Russian trucks transiting through Finland"

I can't believe that... So the Finnish wood industry, not only didn't reform itself but has been unable to compete against foreign wood company that have long been suucessfull in the russian soil.

Now it's the tax payer that will pay the wood company to stay profitable. I might understand why they madereforms in the social sector, saving needed to rescue an ill industry...

Below is a report showing that not all paper companies are doing that bad :

"Mondi Group, then a unit of Anglo American Plc, bought into the Syktyvkar mill in northern Russia in 1996 and took control six years later. The company's Russian earnings grew 13 percent last year, to 546 million rand ($68 million), and it's investing 525 million euros to increase capacity.

``Mondi has an extremely profitable pulp machine, they have the infrastructure, and they know how to deal with the Russian side,'' Kjellberg said.

International Paper last year spent $620 million to acquire half of Ilim Group, Russia's largest pulp and paper producer, with $400 million in annual earnings before interest, taxes, depreciation and amortization.

The U.S. company will add about $100 million to profit next year from the Ilim venture, according to J.P. Morgan analyst Claudia Shank Hueston. International Paper has also owned a pulp and paper mill near St. Petersburg since 1998."

It has been highligted that under pressure, politicians are slowing reforms and not allowing the necessary changes to have companies ready to compete in the world stage, but it won't happen. Again I'm wondering if it's all about lobby pressure or simply preparing the next election again?? -it's really bad-

Consequences can be dramatic for the Finnish economy, if Russia is to counter the tolling measures unless the government is playing poker, that is, just bluffing...

Inflation, What's That?

While having a dinner with some friends, one asked what was inflation?

Some say a picture is worth 1000 words. So here is a very rare photo of "inflation". This beast appear now and then every decade thus making it difficult to capture.

So here it is :

Inflation showing its "ugly head"

Inflation is accelerating in Finland and is threatening the economical stability of the country.

Mr Liikanen, the governor of Bank Of Finland, is clearly distressed, and gives a clear warning on a possible cost-pay spiraling out of control...

"In Finland, too, inflation has picked up substantially. This has been accompanied by a simultaneous quickening in the pace of pay rises and consumer expectations of higher inflation. 'The recent trend is very worrying. The correction of weakened cost-competitiveness is a difficult process in the context of economic and monetary union. It is therefore vital to cut the cost-pay spiral before it gets out of hand,' Governor Liikanen stressed at the press conference."

...If this happen then the game is over. The consequences would be irreversible and the economy will go into a prolonged slump as companies will shift some of the production away thus shooting up unemployment.

To my opinion, in quite few sectors there are pressures on salaries. I don't see any sharp rise in wages and I see the current inflation as a temporary one. An inflation that reflect an overheated economy, propulsed by bad lending practices (no down payment , weak collateral usually based on housing or stocks that is vulnerable, variable rate mortgages (98% of the total housing loan) ), overoptimism by household and companies on the situation of the Economy of Finland as whole.

So no need to talk about a Hard landing or soft landing, as we will still see a sharp slowdown next year. At the end the cards are in the hand of the U.S. and Emerging market. Should they slowdown more than anticipated or fall into a recession , then harder export oriented economies will be hit : The consumption will falter as heavy debt will put a break on internal comsumption, with export slowing down sharply it will provide a double blow.

Prime Rate Up, One After The Other...

Now it's Pohjola Bank (OP) that raise its OP-prime Rate.



"On 24 June 2008, OP-Pohjola Group Central Cooperative's Executive Board decided to raise OP-Pohjola Group's OP-prime reference rate from 4.50 per cent to 5.00 per cent, effective as of 8 July 2008. The decision is based on rising market interest rates. The prime rate was last revised in May."

After Aktia, Nordea, OP is under pressure to raise its prime rate to 5%.

I'll bet that it can quite easely reach 6% by year end if inflation expectation is deteriorating at the currently witnessed pace.

Just by discussing with people around me, they are all raising the alarm concerning food price that are rising by 6-8% if not double digits. It's clear that companies are passing their price to the consumer without a second listening to the ECB warnings not to do so: That's the way Finland is after all, it always overshoot...

Now the best case scenario is a sharp slowdown of the economical activity in order to see lower interest rates. There is a price to pay for that: higher unemployement and asset corrections.

After all we can quite easely fall into the deflationnary trap: going from High inflation to a deflation (oil and asset prices plummeting).

Stock markets are indicators of the health of the economy and since they are forward looking indicators, it presages a sharp slowdown in the next year or so. Housing indicator is a lagging indicator usually peaking when the economical downturn had already started and picking up when the economy has already recovered.

As some readers pointed out, the Japanese scenario is not be excluded and could be disastrous for homeowners. The japanese mistake is attributed on the political side and on banks hiding huge losses. If such phenomenon were to occur, the downturn could be long and painfull...

4.2% : Inflation Out Of Control and Overheating ...

...a combination that can lead to a hard landing if not handled quickly and efficiently.

"Inflation accelerated to 4.2 per cent in May

The year-on-year change in consumer prices, i.e. inflation, calculated by Statistics Finland was 4.2 per cent in May. Increases in the prices of dairy products, vegetables and liquid fuels put inflation up most from April when it stood at 3.5 per cent.

Over the year, consumer prices were pushed up most by risen prices of housing and food. Housing costs went up primarily due to risen energy prices, rents and interest rates. The risen cost of food was due to increases in the prices of dairy and cereal products, and meat. Inflation was also pushed up by increases in the prices of automotive fuels, restaurant and café services and retail prices of alcoholic beverages from last year's May. The rise in consumer prices was curbed most in May by fallen prices of passenger cars, entertainment electronics and computers.

From April to May, consumer prices went up by 0.5 per cent, primarily due to increases in the prices of fuel and dairy products."

Lots of professional, including Bank Of Finland, got their forecast not only wrong but by a big margin. So either they have been clearly misleading the public as to what they should be prepared for or simply their model are not working making it more worrying for the future stability of the economy.

Inflation at over 4% was something predictable, and to be frank, I still think it's a low level as what people really witness in their daily life...

So now we might be heading toward high inflation and a sluggish economical growth. You can call that "stagflation".

The ECB will hike rate next month , interest rates that are for all the European countries. If it was to Finland, interest rates would have been much higher as inflation un-anchoring has clearly happened. Wage are soaring for immovable jobs (nurses, construction work, etc...) threatening an even greater inflation ahead.

Some are saying that 2009 is similar to 1999. I'm afraid those people are highly optimistic as during that time housing, oil, commodities and food prices were not a problem. I will compare 2009 as 1989 or 1979 just before a sharp rise in interest rates in order to bring back inflation in checks and pushed global oil price down by slowing demand world wide with higher interest rates: we are already witnessing that with almost all central banks around the world increasing interest rates.

Except for the U.S, in recent months they had to lower interest rates in order to rescue the whole financing system from collapsing thus avoiding a systemic risk, a contagion to the broad economy that would have overshadowed even the crisis of 1929!. They have already changed their rhetoric, and seem to be in the path to increase interest rates drastically end of the year in order to calm down inflation expectation

Uponor, YIT: Symptom of the Coming Crash

"Building construction activity in Uponor's main markets, especially in Spain and the USA but also in the Nordic countries, has not reached expected levels, and the estimates of the full-year development of these markets have been significantly reduced, to a level that is clearly below what was the basis for Uponor's full-year guidance statement in April.

As a result, Uponor has intensified actions to adjust production capacities serving these markets to match current demand. These actions include reductions in personnel as well as temporary production shutdowns.

Due to the weaker market development, Uponor issues a new guidance for 2008 for its continuing operations, which exlude the net sales and operating profits of the UK/Irish infrastructure business: The company's continuing operations' net sales is not expected to quite reach last year's level and the operating profit
is estimated to fall short of the 2007 level. "

UPONOR, UPoNOR (UpNorth?) should rename itself into DownoSo (DownSouth) or simply dinosaur, as the time for construction market is the most painful that one has witness since the disapearance of the last big pets : the Dinosaur.

Another big beast, is YIT which has been clearly rescued by the state and somehow by Bank of Finland (selling at a very competitive price some land, see previous article). The state, since it ramped up its spending on infrastructure , allocating big tax payer money to company such as YIT to maintain their balance sheet afloat. After all, its legitimate since lots of jobs are at stake as well as the economical stability.

So it's the end of the reign of the Crane...

25% increase in default...

"According to a report in the daily Aamulehti, data gathered from banks by the Financial Inspection unit show that the number of defaulters has increased in the past two years."

At the end of last year households that had not paid from one to three months of their loan instalments had increased by 25 percent over the previous year.

The number of households that had gone at least three months without servicing their loans also stood at 25 percent more than in 2006.

In spite of the statistics, the inspection unit found that the proportion of bad loans still remains at under one percent of all loans outstanding - and banks themselves are not unduly concerned about the situation.

The Financial Inspection unit suspects banks of granting excessive housing loans to clients, which then show up as higher numbers of defaults when interest rates rise."

No surprise about that. But think about it, the economy is still booming well for another 3 to 9 month then the slowdown will accelerate thus pushing even higher defaulters, slowing even more the economy then exarcerbating even more the number of default..got it? when it start, it's a cycle, it continues until a bottom is found.

The impact on the housing market? nothing good in the medium and longer term. You will have in the short term the illusion that the housng market is still holding and that prices are still stable. This is only an illusion as the process of normalisation has started, the market will autoregulate itself ...unless corrupt politicians, for self interest and under business pressure, try to delay the correction by passing some legislation or "socialize" the losses.

Regarding debt, there are as well the predator lenders where you have the possibility to get loan through SMS, "instant loan". As usual the financial watchdog, raise the issue but that's all it did...they are still operating and ripping off people...

Revisiting : Euribor Heading to 6%

Euribor 12 kk (360) = 5,418% (+5,72%)

Few weeks ago (see article), I wrote that Euribor heading to 6% was not unrealistic.
At that time I thought that could come gradually and reach it sometime end of the year or in 2009.

Today, it was shocking to witness the Euribor at 5.4 % !


The reason is Euribor reflects the stress or low confidence that banks are willing to lend to each other, persistent credit crisis and a gearing for the end of the quarter . Another way to put it, thay need to have enough capital to handle any future losses on non performing loans or defaults.

Euribor reflects as well the level of future interest rates thus higher there are and higher is inflation expectation.

We know clearly that policy mistake were made by the U.S. Federal reserve to let its interest rates to 1% in 2003, and the ECB to let it to 2%. All they have done is to throw oil to the fire so to say, triggering the biggest ever rally in oil, food and real estate price...

The U.S. has learned nothing to past mistakes as they have again lowered their interest rates from 5% to 2% in a record time. They had to bail out the financial system and glorify "moral hazard", at the end they had to rescue the whole system: Capitalism.

Europe, through the ECB, has a very clear mandate and it is to fight inflation. They are not following either the US or UK, instead they had maintained the rate at the same level with the possibility to raise rates next month.

People purchasing power in Europe and around the world has been eroded at the a very rapid pace, something not seen since 1989 or 1995.

In Finland, Competitiveness is plummeting (wage soaring in immovable jobs, and unbearable inflation i.e rents, food transportation etc...) and Corruption is growing (Land allocation, political etc...) . All the ingredient that could lead to very hard time ahead...

At some point, the system need to clean up; that's the one of the positive characteristic of capitalism ...

Interest Rates Up in July Possible

"European Central Bank President Jean- Claude Trichet said policy makers may raise interest rates as soon as July after increasing the inflation forecast for this year and next.

'It's not excluded that, after having carefully examined the situation, that we could decide to move our rates for a small amount at our next meeting,' said Trichet at a press conference in Frankfurt after the ECB left its benchmark rate at 4 percent. 'I don't say it's certain. I said it's possible.' "

I wonder why they have to wait until July to increase interest rates, after all the mandate of the ECB is to keep inflation rate below and near 2%. They are clearly failing their mandate as inflation is running at almost 4% (well for the folks in their Ivory tower, for the normal people back on earth, inflation is running at over 7% or more).

They will argue that it's because of oil and food price shock, and will make a cocker face, and say that they can't do anything about it. Hummm Can't they? where this high oil consumption is happening? Asia..to whom they sell massively? Europe...

Indeed Europe has been in a consumption binge in the past 5 years as banks open they door and gave money as some give seeds to the pigeons. Now the ECB got to increase the debt servicing in order to slow banks to lend like mad. Borrowing cost need to be increased in order to calm down they materialistic behaviour and stop them from running massive debt (which is much bigger than the level reached in the late 80's!)

Finnish Housing Market Weakening

"Finland's Mortgage Society said in a statement Wednesday that the housing market outlook was clearly weakening despite brisk sales of old houses and flats this spring."

"The private credit institution added consumers' confidence in their own finances and in the economy had been shaken by the eye-watering price of oil, the rising price of food, inflation and rising interest rates."

Good, some are not only looking at their rear mirror but have a forward looking attitude.

Alas, this warning comes a little bit late for people who have taken massive mortgage (pushed by the smiling banker face).

Now, if as planned the market slows drastically during the next few years, then for those who have purchased at the top, have enough amunition (i.e saving) to weather any possible economical crisis. For those who are about to buy, it's better to have a 'wait and see' approach. For those who need to sell, the faster the better even pushing some discount...

Credit Crisis? What credit crisis...

"Housing loans on the increase in April Loans

In April 2008, households withdrew new housing loans to a total value of EUR 2.1 billion compared to EUR 1.6 billion in March 2008. The average interest rate on new housing loans was 4.88% in April, up 0.03 percentage point on March.

Outstanding MFI mortgages to households amounted to EUR 64.2 billion at the end of March, which represents an annual growth rate of 5.02%. The annual growth rate of mortgages was 12.0% in April, up from 11.9% in March.

In April, the total stock of MFI corporate loans amounted to EUR 52.5 billion, with the interest rising to 5.22%, up from 5.17% in March. The annual growth rate of MFI loans to corporations has been clearly on the increase in recent months, amounting to 18.2% in April compared to 16.7% in March and 13.5% before that."

Banks in Finland have opened the Money tap, no wonder why price are still either up or stable as opposed to many other country in Europe. The Finnish bankers are again overconfident, a confidence that cost them their shirt in 1990.

Are we going to see a repeat of the 90's slump? yes if the Finnish bankers thinks they are smarter than the rest or if simply they want to push household to the limit until they collpase...

Labour Tax Too High and Property Tax Too Low

"Taxes on labour are too high and those on property too low.

Although labour remains less mobile than capital, globalisation has facilitated the mobility of jobs and labour.

The tax burden on labour is relatively high, particularly for upper-income earners, and there are concerns that by pushing up labour costs, the high tax wedge may be an important factor in production-location and off-shoring decisions.

The tax burden on labour should be lowered with priority being given to lowering the top marginal tax rate on labour to keep and attract highly skilled jobs and to reduce incentives for income reclassification.

On the other hand, immobile factors such as immovable property are taxed lightly and there is considerable scope for increasing the taxation of property and land.

This makes sense not only from a globalisation perspective (given that immovable property is an immobile tax base) but also because property taxes are progressive, and hence may help to substitute for a reduction in labour taxation of the top income earners. "

This message is from the OECD, and is indirectly targeted to Jan "incompetent" Vaapavuori. Indeed, He was warned about distortions that will cause to the housing market already back in 2003. Now, 5 years has gone and nothing much has been done.

In the light of the recent corruption scandal, that might shed light on why the government is dragging his feet on such reforms. At the end, many big business lobbyers have been sitting on land, and cashed vast some of money hence played the role of prime speculators.