Denmark mortgage bonds on cusp of 'crisis'

Denmark's $550bn mortgage bond market is heading for a "potential crisis" that could end with banks, pension funds and money market funds nursing heavy losses, Arbuthnot Latham has warned.

According to the private bank, Danish households are the most leveraged in the developed world. Household debt is at 309 per cent of disposable income, while 220,000 households are in negative equity following a 16 per cent fall in house prices since 2007.

With 57 per cent of mortgages being interest only (up from 10 per cent in 2004) and 71 per cent on an adjustable rate (from 38 per cent a decade ago), borrowers are acutely exposed to any interest rate rise, said Gregory Perdon, co-chief investment officer of Arbuthnot Latham, who compared Denmark to Iceland before its crisis.

Danish banks could also be forced sellers of mortgage bonds if the European Commission downgrades the role that covered bonds can play in meeting banks' liquidity coverage ratios, Mr Perdon said.

"As we looked deeper into this subject, we became more and more convinced that the market is underestimating the risks," he said.

"Several years on from the global financial crisis we ask the question, 'Have we not learned from our mistakes?'. In order to avert a crisis the government, banks and stakeholders should come out and admit the system is unsustainable."

Mr Perdon, who said 10-20 per cent of Danish mortgage bonds were held by investors outside the country, feared a government rescue package may be needed to support a 200-year-old market that has only defaulted in the 1930s.

The Danish central bank declined to comment.

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