How would a country with negative interest-rates like Denmark respond to a financial crash?

As the world finds itself enmeshed in something of a financial crisis as a butterfly flutters its wings in China thoughts turns to what might be called International Rescue. There has been call after call from investors for central banks to “do something” and presumably they are not asking the US Fed and the Bank of England to deliver on their promises of interest-rate hikes! However there are issues over what central banks have left in their toolkits especially in places like Denmark which have already plunged into an icy cold world for their official interest-rates.

Effective from 6 February 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.25 percentage point to -0.75 per cent.

Thus we are heading for nearly 7 months at such a level and in fact just under a year of continuous negative interest-rates as it was in early September last year that rates were cut to -0.05%. This added to the policy of negative interest-rates which began in July 2012 and which Denmark had tried to escape before plunging back into them. The Danish Nationalbank crossed quite a Rubicon back then.

For the first time in its nearly 200-year history, one of Danmarks Nationalbank’s interest rates is negative.

The cause of all of this as so often is the Euro as Denmark faces the cost of being a small country trying to float next to a behemoth.

The negative rate of interest on certificates of deposit was set solely with consideration to maintaining Denmark’s fixed-exchange-rate policy. The fixed-exchange-rate policy entails that monetary policy is laid down with a view to stabilising the krone against the euro.

So we note that should we see a further crash then for Denmark a repeat of the 9/11 response or the response to the 2007/08 crash would mean it going ever more negative in terms of interest-rates.

The Euro

One of the problems of pegging yourself to a currency is that you inherit its problems. After a period of cutting interest-rates in response to a weak Euro Denmark has over the last few days faced a stronger one. The calls for the Euro to fall to parity against the US Dollar have been replaced by a reality of a rise to 1.16 or so versus it. Rather ironically we saw the main two QE (Quantitative Easing) central banks facing stronger currencies as the Yen surged too and at one point the two currencies values against the US Dollar crossed over which was rather extraordinary.

By EU reckoning 6% appreciation in TWI has same eco effect as a 100bp interest rate hike

That has happened since mid-April and does not fit the lower Euro theme at all. It also shows a cost of pegging your currency especially to a currency bloc with a list of troubles. The situation is worse if you use the Bank of England rule of thumb as it would consider the recent currency appreciation to be equivalent to a 1.5% interest-rate increase.

So they cut interest-rates to prevent a currency rise and then got one anyway by default! Time for some Fleetwood Mac.

Oh well

Now, when I talked to God I knew he’d understand
He said, “Stick by my side and I’ll be your guiding hand
But don’t ask me what I think of you
I might not give the answer that you want me to

The real economy

The official view is that things are going rather well or “on track” as you might say.

The upswing is expected to gain strength in the coming years. Growth in real GDP is forecast at 2.0 per cent this year and 2.1 per cent next year. A slightly lower growth rate of 1.8 per cent is expected in 2017, when the economy reaches its normal capacity.

Ah yet more output gap theory. It persists in so many places which shows that reality is often not a friend of official views. However the new Danish government has just announced numbers which are not quite so optimistic. From Bloomberg.

The Liberal government of Prime Minister Lars Loekke Rasmussen sees gross domestic product expanding 1.5 percent this year, compared with 1.7 percent estimated by the Social Democrat-led coalition that was ousted in June elections. GDP will expand 1.9 percent in 2016, also less than the 2 percent previously foreseen, the Finance Ministry said.

Splitting hairs maybe but it has had more of an impact on the expected public finances.

The Finance Ministry in Copenhagen said the budget deficit in 2015 will be more than twice as big as previously estimated, mostly due to a slump in taxes from Danish pension assets.

That seems somewhat odd as Danish equity markets are still up on the year so perhaps we are seeing an effect of negative interest-rates, as I have expected them to hit pension funds and other longer-term contracts, but the new numbers are shown below.

The budget deficit was revised to 2.7 percent of GDP this year, more than twice the 1.3 percent previously estimated. The gap will widen to 2.8 percent next year, the Finance Ministry said.

Oh and readers of my post on the 4th of this month will not be surprised to see that I noted this bit too.

House prices will rise 6.5 percent this year and 4 percent in 2016, according to the Finance Ministry. Prices rose 3.4 percent in 2014.

Good news or not?

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…

One ominous feature of these times is to be top of en economic table and on that score I present this from John Kay in the Financial Times from late June.

For foreign policy experts, America is number one. But, from an economic perspective, the Danes win….. The wealth of Denmark is instead built on exporting bacon and drugs to control diabetes — an appropriate combination — around the world.


It is dangerous to be top of an economic league table in these times as calamity is often hiding around the corner. But we see that like the UK situation any financial meltdown will be transmitted to the real economy to a large degree by the housing market. This is awkward to say the least when it is not only official interest-rates which are negative. From the Danish Federation of Mortgage Lenders.

Some of the approaches where negative interest rates pass through to borrowers are being put to use.

Rather than returning actual cash they are mostly reducing the capital owed. Oh and what could go wrong?

The Danish mortgage model is regarded as being one of the best of its kind in the world. It contains a unique balance principle and a market-based repayment system. Hence, the Danish mortgage credit market is characterised by transparency, competition and stability.

A financial crash would challenge this for obvious reasons in a world where the Danish mortgage banks apparently think that the new Basel regulations should not apply to them. But if we move to my subject of the day which is how would Denmark respond? I would expect them to cut interest-rates even further especially if the Euro were to follow the pattern this time around and rally. At which point the famous words of William Shakespeare might then be heard one more time.

Something is rotten in the state of Denmark.


8 thoughts on “How would a country with negative interest-rates like Denmark respond to a financial crash?

  1. Hi Shaun

    The issue of negative interest rates is an intriguing one.

    What you didn’t say, and may not know, is the knock on effect to retail savers in Denmark as a result of the negative rates to borrowers. Assuming that there is a spread then does this mean that depositors were charged even more?!! Are depositors going to sit back and watch this, unconcerned that their capital is being taken away? This is difficult to believe. Also those saving in DC pension schemes will be none too pleased at the prospect of working into their nineties! And of course such things as insurance policies will rocket in price.

    If this (negative IRs at the retail level)comes to the UK , which is quite possible, then, in my view, it would amount to a stealth tax. It might be said that it is the banks and not the government which is charging this “tax” but this is just casuistry; it is caused by government policy and would be perceived as such by the sheeple. I for one would put all my money into current accounts, but of course these would then probably make a charge as well – taxes do have to be paid.

    It does not stretch credibility too far to see the US going for QE4, resulting in a huge drop in the dollar together with weak demand for commodities, together causing an EM rout and a rise in the £, Euro etc relative to the dollar which will really bring on the deflationary blues with a vengeance. What then? IRs at -5%, -10%?!!

    • Hi Bob J

      I was playing the guessing game earlier and estimated that Denmark would be forced to around -2% initially should things turn sour in the way they did yesterday on a more sustained basis. As to savings rates central banks are euphemistic on the subject but reading between the lines I would expect institutional rates to be negative but retail or personal ones to be not so at this stage. I have looked it up and you can get a return of sorts.

      Nordea Denmark 1 Year Fixed Rate DepositNordea Denmark

      This interest rate applies to the “Pluskonto Fast Rente” account or in english the ‘Fixed Rate Plus Account’. This maturity term for this product is 1 year / 12 months and for the ‘basic’ specification.

      However as time goes by more retail savings rates will be forced into negative territory. If anybody reading this has detailed knowledge on the ground it would be fascinating…..

  2. Great column, Shaun as usual.
    Thank you for reminding me of the October 1, 2012 Canadian SNA revisions. When I looked up the Daily release it seemed that the Canadian 2012 revisions had the opposite effect of the US 2013 revisions: they made the 2008-9 recession look deeper rather than shallower. The growth rate for 2008Q3 went from -0.9% to -1.1% and the growth rate for 2009Q1 from -2.0% to -2.2%. So the -4.2% peak-to-trough decline in real GDP for Canada reported by the WSJ when the 2013 US SNA revisions occurred would have been more like a 3.8% decline in official estimates prior to October 2012. There’s no breakdown of the revisions in terms of R&D effects and other changes. However, it should be remembered that while most of the changes would raise real GDP levels, they wouldn’t necessarily raise growth rates.
    Munir Sheikh resigned as Chief Statistician in July 2010, so at that time official StatCan and BEA estimates would have shown that the peak-to-trough drop in real GDP in the 2008-9 recession was almost one percentage point greater for the US than for Canada. This was a huge gap that was eroded to almost nothing (but didn’t entirely disappear) due to revisions by both agencies. Was he really unaware of this? It would appear, most improbably, that he was, or else he would not have called the belief that Canada had a shallower recession a myth.

    • Hi Andrew and thank you.

      I think the main Anglo-Saxon nations were all ahead of the UK in the ESA10/SNA08 changes although I have to confess I have seen no mention of New Zealand. As to Canada it is intriguing that it was revised down as the recession mantra is that they are usually revised up over time especially if there is a helping hand (R&D etc…).

      Do you think he was that unaware? We have had clueless people in important positions in the UK so it is not so impossible!

      • It was only on November 30, 2009 that 2009Q3 real GDP estimates were published for Canada, suggesting that the trough of our recession was in 2009Q2. The StatCan release for real GDP estimates for 2009Q3 didn’t draw any comparisons with the US, but they never do. (The US BEA had published 10 days before, so such a comparison was possible.) If one looks at the Bank of Canada MPR for January 2010, though,
        the first to be published following the 2009Q3 data release, it has a technical box called “How Severe Was Canada’s Downturn? A Global Comparison”. It compared the 3.3% decline from peak to trough for Canada with the 3.7% decline for the US. (So when did the US decline go from 3.7% to the 4.7% mentioned by the WSJ? This is getting confusing!) If Mr. Sheikh didn’t see this, he really wasn’t paying attention. While not the almost one per cent difference I postulated, 0.4 percentage points is still a big difference.
        I suspect that Mr. Sheikh was and is aware that the official StatCan and BEA estimates were showing that the Canadian recession was appreciably shallower for a long time, and it is pure political partisanship that makes him call the belief that we had a shallower recession a “popular myth”.

  3. Always think it’s a bit daft aligning yourself with another currency, you give up a certain amount of control and independence. Decisions are taken to keep currencies linked, not for sound economic reasons(if there is such a thing!). Shaun I too remember the dear old days of the ERM!

    • Hi Foxy

      In essence you are importing somebody else’s monetary policy so I can see a gain if you have lost complete faith in your own country on that front in a Venezuela or Zimbabwe fashion. In a way the UK had a more minor version of that as we replaced targeting £M3 Money Supply with shadowing the German Dm at around 3 Dm. It of course rather famously ended in tears although did then set off our real economy on a stronger phase hence “White Wednesday”

      Oh and I remember it like yesterday, in fact probably better than yesterday!

  4. Hi Shaun,

    A bigger negative interest rate may be tested sooner rather than later as from what I have read today it is not only China that is slowing down but also US manufacturing and freight volumes are slowing fast as well. We are probably coming to the end of an average length economic cycle, so no real surprises here, but it will be tough for those countries that didn’t have any growth in the current one!

    Commodities and oil are already on the slide and in the words of Status Quo:

    Get down deeper and down
    Down down deeper and down
    Down down deeper and down
    Get down deeper and down

    As a major part of the global economy, the Euro seems to be the economic equivalent of a black hole in space. Its irresistible gravitational pull, seems to be dragging everything else in its near orbit to join it as a dysfunctional currency?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.