Denmark treads where Switzerland failed so is it “history repeating?”

One of the themes of this blog concerns the issue of what have become called the currency wars as countries try to gain a competitive advantage by pushing their currency lower. For example the classic case of this in recent times is Japan where the policy of Abenomics involves a lower value for the Japanese Yen which is supposed to reinvigorate both inflation and the economy. If we look at it in Euro terms then it soon pushed through the 100 Yen barrier in late 2012 on its way to around 145. However this then gets awkward as we then entered a phase where the European Central Bank wanted the Euro lower too and they obviously both cannot fall! In this new phase of the currency war it is the ECB which is winning so far as the Euro has dipped to 134 Yen as I type this.

Looked at like this with two major currency blocs both trying to depreciate there is not only an Orwellian theme but also a reminder of the competitive devaluations which so disfigured the Great Depression of the last century.


The catch here is of course the fact that if a currency falls there has to be another one which rises. The only real exception is if you value your currency against a precious metal like gold or something similar. In a world of fiat currencies though that game is relatively rare. So someone has to take the strain and see their currency rise. We saw this for a sustained period for the Swiss Franc and the Japanese Yen as the “carry trade” swept them higher and it is therefore no surprise to find them regularly firing salvos in the currency war. But there is one currency bloc which is causing particular trouble right now and it is the Euro. I have written often about Switzerland’s struggles but now it is the time of Denmark to find itself in a currency battle as we mull how many economic casualties there will be from the fall-out.

But Denmark is not a Euro member

This is true but it does have a currency peg to it which its central bank calls a fixed exchange rate which is nearly but not quite true.

Denmark participates in ERM 2 at a central rate of 746.038 kroner per 100 euro.


The standard ERM 2 fluctuation band is +/- 15 per cent. Because of the high degree of convergence, Denmark has concluded an agreement with the European Central Bank (ECB) and the euro area member states on a narrower ERM 2 fluctuation band of +/- 2.25 per cent. This means that the krone can only fluctuate between 762.824 per 100 euro and 729.252 per 100 euro.


I have to confess that as someone who experienced at the sharp end (markets went wild) the 1992 ejection of the UK from the original ERM it does send something of a shiver down the spine to be reminded of it. Oh and as I shall recount in a minute I bet they wish now that they had stayed with the 15% band!

Currency reserves are rising

Unlike the UK and the pound in 1992 the problem for Denmark is a weak Euro so it is finding that the Krone is rising. Or as its Monetary Review puts it.

In recent months, the krone has been stable vis- à-vis the euro at a slightly stronger level than its central rate in ERM 2.


Seems so calm and orderly doesn’t it? Well perhaps the image of a Swan sailing serenely but kicking vigorously underwater applies as we note yesterday’s data release.

In January 2015 the foreign-exchange reserve increased by kr. 106.6 billion to kr. 564.1 billion. The increase reflects Danmarks Nationalbank’s net purchase of foreign exchange for kr. 106.5 billion,


So a 19% rise in one month as we mull the word “stable”. Perhaps it was stable because the central bank made it so!?

This poses a familiar problem as we consider the situation that Switzerland found itself in. A country in such a position finds itself getting ever more of a currency which is not wanted by others at that price. Therein lies the beginning of the issue which for a while a central bank can ignore as it can let its balance sheet grow and to an extent it can ignore reality. However unless things move in its favour reality catches up in the end even with central banks.

The first issue that needs to be faced is what to do with the Euros that are purchased. This is a problem that Switzerland attempted to deal with by converting the Euros it bought into other currencies by buying Euro area bonds and even by buying equities as the numbers and size of the inflow became too great. Right now Denmark does not need to do that but if this carries on then it will find itself in the same situation. So far the foreign currency reserves amount to about 30% of Denmark’s GDP so more than UK QE for example but still a long way short of the Swiss Position. However there is an eerie echo of the Swiss position.From Bloomberg.

The bank can produce an “unlimited supply of Danish kroner” to weaken the currency, Karsten Biltoft, head of communications at the central bank in Copenhagen, said in a phone interview said.


How did that work out for Switzerland?

Negative Interest-Rates

In another attempt to deal with the problem Denmark has plunged itself into the world of negative interest-rates.

Effective from 30 January 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.15 percentage point to -0.50 per cent.


Again we see a tactic from the Swiss play book which has an ominous ting to it. You see it was not that long after it announced its move into negative interest-rates that Switzerland capitulated on its Euro cap.

A domestic problem for Denmark

If we look at domestic monetary conditions then there is a clear issue with lower interest rates. Let me take you back to April 2014.

During the most recent boom, borrowing by households surged, rising more sharply than ever before…….. But high loan-to-value ratios amplify cyclical fluctuations in the Danish economy.


Why is this being mentioned? Well according to Statistics Netherlands the ratio of household debt to GDP was 240% at the end of 2012. So higher than that of the Netherlands where as regular readers of my blogs will know it has proved to be a problem. As ever housing based debt is at the heart of it and even the Danish central bank has its worries. The emphasis is mine.

Loans with deferred amortisation make it possible to reduce other debt and can be used as an instrument to smooth consumption over a lifetime. However, there may also be considerable risks linked to deferred amortisation loans at high LTV ratios, e.g. if house prices fall and the deferred amortisation period expires.


Now if we move to the moral hazard arena what do we think will happen to this boom as negative interest-rates spread through the system?

They are spreading as highlighted here.

The yield on 1-year mortgage bonds reached a historical low of just under 0.1 per cent in mid-September. Since then it has risen, to almost 0.2 per cent in early December.


So 0.2% is a rise? I think we get the idea as we wonder what mortgage offers will be available soon in Denmark and what that will do to household borrowing and house prices.

Government bond yields

These too have plunged and the ten-year yield is now 0.25%. In the media rush to see if those of Germany would fall below those of Japan it was missed that Denmark had got there first (h/t @DShahTR).


In these times you may not be surprised to read that inflation is low (0.1% in December) but there is something to mull in the fact that Denmark has a reputation for a high price level. According to the Big Mac Index of the Economist it is the 3rd most expensive and one of the only 5 countries which are overvalued.


There is much to consider here in economic terms as we look at the way that a currency peg has implications for domestic monetary conditions. In essence monetary policy instruments are busy with external issues and may be and in this instance are inappropriate for the level of household debt. A clue to the size of the issue is found in this from Bloomberg.

Including the insurance industry, Denmark’s financial system is 650 percent of gross domestic product, the IMF estimates. Banks alone have assets that are four times the size of the $310 billion economy.

I will leave for another day the full debate over whether the Euro peg is a good idea partly because it would be such a big change for Denmark as it has operated such policies for decades now.

However as I wrote this blog I was reminded of Switzerland and my forecast back in the day that its link to the Euro would eventually go. So let me hand you over to Dame Shirley Bassey to sun it up.

The word is about, there’s something evolving,
whatever may come, the world keeps revolving
They say the next big thing is here,
that the revolution’s near,
but to me it seems quite clear
that it’s all just a little bit of history repeating



19 thoughts on “Denmark treads where Switzerland failed so is it “history repeating?”

  1. Hi Shaun, there must be quite a few blond beards being worriedly stroked in Copenhagen just now, not to mention loose threads on cable-knit pullovers being nervously picked at.

    As you say, it’s hard to see what they can do about it. Fighting to maintain the peg risks all sorts of unintended consequences for the broader economy. Letting the Krone float risks a horrible recession although allowing Danes some cheap foreign holidays. And if the might of the SNB couldn’t resist the market attacks it’s hard to see how Denmark can win this one; there’s too much money to be made.

    I know we don’t do politics here, but it’s worth mentioning the peg exists because whilst Danish politicians are very much in favour of joining the Eurozone, the population is quite Euro-sceptic and want to keep the Krone. I guess the lesson is if you strongly link your economy to the Eurozone then you either better be prepared to join the single currency (and if they had where would they have been in 2008?) or to float from the get go. Pretending to have “converged” has been proved yet again to store up trouble for the future; see Greece for details.


    • Hi Andy

      Beards and pullovers is that a new Danish detective series on BBC4? 🙂 As to Denmark I think that it is a case of do not start from here. Once you are in such a situation it is usually too late…

      As for now they could go to a free float but might float upwards like a helium balloon. Or they could join the Euro but that has problems related to its issues. Or if they stay as they are, they risk their reserves going up,up and away. Not much of a choice.

      They could sort of return to the past and try to form a sterling bloc with the UK and some of the other Nordic nations. It is so left field that it might even work!

  2. Great column Shaun, as usual.

    The inflation rate you provided for Denmark was for the HICP, which excludes owner-occupied housing. Since the annual inflation rate for owner-occupied flats was 8.4% in 2014Q3, down from 8.8% in the previous quarter, the inflation rate including an OOH series based on the net acquisitions approach would be somewhat higher, although the homeownership ratio in Denmark isn’t as high as in the UK. Since Statistics Denmark has presumably already provided Eurostat with an OOH series to 2014Q3 it is a shame that they have not chosen to publish it, as the ONS published its British counterpart.

    I have in-laws in Bileća in Bosnia and Herzegovina. It does seem curious that the Swiss franc and the Danish kroner have been under so much pressure but that the Central Bank of Bosnia and Herzegovina is still pegging the convertible marka to the euro at an exchange rate of 1 KM=0.51129 euros, with no difficulties that have made it into the mainstream English-language press. Moreover the convertible marka has a firm peg to the euro, unlike the Danish kroner.

    • Likewise the Bulgarian Leva (BGN) is pegged to the Euro, at the same rate which is equal to 1.0 DEM.

      Borisov (sometime PM) said that the leva was still pegged to the DMark and should the Euro disintegrate or Germany leave -> that the leva would remain pegged to the German currency.

      • Hi ExpatInBG

        That really would be a hard currency plan! Actually the Danes could argue the same as they stopped devaluing against the Dmark in 1982. Mind you has Borisov allowed for a 30% revaluation? I suspect a new Dmark would reach for the sky and soar.

        • Bulgaria is a low cost country, so there is leeway for appreciation. However much of the productivity is poor and we’d see a simultaneous devaluation in Greece.

          Talk is cheap and pegs are easy to move, where Greece faces a much more significant challenge trying to devalue inside the Euro.

    • Hi Chris

      It is certainly possible but there is a long list of candidates these days. The Swiss are offering negative rates as are the Euro area and there are one or two flickerings in Japanese Yen terms. So there might well be unintended consequences but they are likely to be spread across more places this time around.

  3. Hi Shaun

    History repeating itself, you say? We seem to have done both tragedy and farce in recent times so I wonder what comes next. A continuing farce with tragic elements perhaps?

    A little AWB to go with your popcorn as the show goes on … and on … and on …?

    • Thanks, Jim M. Following Shaun’s column has given me a real education in British rock videos. If Shaun thought the song goes on and on, I noticed that the video you provided linked to a shorter, punchier version featuring Legs and Co. that is also better viewing.

  4. Yes,I can well imagine wll the retail traders who leveraged 50:1 on the Swiss euro peg and survived have now piled into the next ‘can’t lose ‘ trade.

    ‘History doesn’t repeat itself but it sure does rhyme.’
    Don’t know who siad it but very wise man.

    • Hi Dutch

      Yes the inability of the establishment to learn nothing is almost admirable in a way, until one things of the effects and consequences. As to the 50:1 leverage the only reason that they may not be around right now is that the firms offering it have at best singed fingers and at worst are out of business.

  5. The repetition of failed policies; austerity and currency pegging.
    Do our politicos really have the IQ of grazers, or is there an alternative motive?
    I really find it hard to believe that a PPE is that simple to get.

    • Austerity, that’s another candidate for Shaun’s dictionary. Really reducing spending would be beneficial in the long term and might be less painful than thought in the short term if it reduces living costs via competition.

      How many Brit Politicians have downsized their luxury Roller/Merc/BMW for a Mondeo ? How many politicians have downgraded their taxpayer funded flights to economy class ? MPs expenses ? How many quango directors have suffered pay cuts ? (Certainly not the BOE 9)

      Austerity as currently practiced is a scam that hides growing inequity between the senior bureaucrats, politicians and the 99% – They get richer as the national debt keep growing.

      • At least they are richer in fiat GBPs that will be worthless at the same time as mine are! Maybe they have converted these GBPs to assets that retain their value? If things truly break down then who (as in Hitchikers Guide…) will be first up against the wall?!

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