Denmark’s ECR score falls as pressure grows on banking sector
High unemployment and banks' challenges have triggered a fall in Denmark's sovereign risk profile.
Denmark’s ECR score has deteriorated by 5.6 points (out of 100) since June 2011, to 83.5 in August 2012. This has resulted in the country’s ECR ranking falling four places from June 2011 to eighth position. A combination of higher unemployment levels, increased bank instability and declining consumption levels have contributed to Denmark’s increased risk score decrease.
ECR analysts have lowered their scores in the banking-stability indicator of the survey by 2.3 points (out of 10) during this period, reflecting concerns about Denmark’s high exposures to the eurozone economy and the country’s property sector, where house prices fell 7.4% in May 2011, according to Bloomberg. This has resulted in low capitalizations and vulnerable loan portfolios, culminating in several bank failures.
Standard & Poor’s decision to revise its Banking Industry Country Risk Assessment on Denmark (AAA/Stable/A-1+) to group three from group two reflects the difficulties the economy faces in dealing with the fallout from the eurozone crisis and weaker economic growth during the short term.
Denmark’s weakening banking system is a main reason why the sovereign’s credit default swap (CDS) spreads have increased to record levels, as “the Danish CDS spread (five-year mid prices) rose suddenly, widening by 193.18% in 2011, reaching an all-time high of 159.42 basis points in September 2011”, according to Standard and Poor’s.