When one looks at Europe, it appears like a strange mixture. The confidential wisdom is that the northern countries such as Sweden, Finland, Norway, Denmark etc. are in great financial shape, while the southern countries like Greece, Spain, Italy, etc., are in bad shape.

Luxor Capital, a value based hedge fund recently released some shocking information about one of these countries. Denmark is not nearly as sound as the country appears. The conventional view is that Denmark has a low debt to GDP ratio of 46 percent, and running deficits of 4 percent of GDP; therefore the country is in good shape. If one compares that to the U.S., the debt to GDP ratio is 100 percent, and the annual deficit is 10 percent.

However, much more can be found beneath the surface. The banking system in Denmark has grown to astronomical heights. In the U.S., bank assets as a percentage of GDP is 90 percent. In Denmark, the number is 454 percent.

In comparison, Iceland — which experienced a severe economic crisis in 2008 — had a ratio of close to 400 percent.

The problem becomes apparent right away. The banks in Denmark are simply too large to save. Denmark’s largest bank, Dankse Bank has assets equal to 200 percent of Denmark’s GDP. That would be similar to JPMorgan having $30 trillion of assets.

This is not Denmark’s only problem, housing and mortgages are another one. Denmark has experienced a rapid rise in housing prices since 2000.

Housing prices shot up approximately 100 percent from 2000-2007.

Denmark’s banks have also been issuing adjustable-rate mortgages (ARMs) at increasing rates. These types of mortgages were characterized by the Consumer Federation of America as predatory loans. They played a major role in the US housing bubble, making up 90 percent of new loans in 2006. By May 2008, subprime ARMs had a default rate of 25 percent.

Today, ARMs make up 68 percent of new loans in Denmark. Now the math starts to look a bit frightening: Denmark has a GDP of $310 billion. The banking system has approximately 1.5 trillion of assets.

The mortgage market in Denmark is over $500 billion. Assuming there is a 25 percent default rate on the 68 percent of loans; Denmark would have a shortfall of $85 billion.

It gets worse. If people start to default, housing prices will decrease and the whole economy would suffer. Denmark’s low GDP to deficit ratio would rapidly rise, even if the government did not spend a penny more.

There have been recent talks of a trillion dollar plus plan to help bail out the southern countries like Italy and Greece. However, few have taken notice of the bailout, which Denmark could need.

(The author of this article has no positions in any securities mentioned).