Today i wish to travel across the bridge which becomes a tunnel that is the engineering marvel which connects my subject of yesterday Sweden to my subject of today Denmark. There is also something else which connects these two Nordic nations which is that they have been forerunners in the central banking experiment of negative interest-rates Indeed as Bloomberg reminds us Denmark was the crash test dummy.
The DCB — or Danmarks Nationalbank — first cut its policy rate below zero in July 2012 in a bid to fulfill its sole mandate, which is to defend the krone’s peg to the euro.
This reminds us that the outbreak of negative interest-rates is driven by external influences on the economy. It is not internal economic developments as much as the exchange-rate and in particular the one with the Euro which drives matters here. This is explicit policy in Denmark which is one which the Riksbank in Sweden has chosen to copy. Actually 2015 was a year of two halves for the Nationalbanken as its latest Monetary Review informs us.
Total intervention sales of foreign exchange for kroner by Danmarks Nationalbank have amounted to kr. 230 billion since April. Net intervention purchases at the beginning of the year reached kr. 275 billion.
So up was the new down leading to not far off-balance in the end. However it looks at interest-rates like this and it is referring to the interest-rate cut by the European Central Bank in December.
This meant that the monetary policy spread between Danmarks Nationalbank’s rate of interest on certificates of deposit and the ECB’s deposit rate narrowed from -0.55 to -0.45 percentage point.
This means that in effect the Nationalbanken has mostly delegated monetary policy to Frankfurt as the ECB policies of interest-rate cuts, ever more QE and open mouth operations to lower the Euro put pressure on the exchange-rate and its mandate. That will lead to some fun Thursday week when the ECB eases again and the Danes find themselves having to join it as its version of the Beatles Yellow Submarine heads for the depths.
The impact of negative interest-rates
The Governor of the Nationalbanken Lars Rohde was interviewed in Shanghai on Sunday and Bloomberg have released this. Let me rearrange their order and start with his main priority.
Rohde warned that the longer-term impact of negative rates on the banking system and its profitability must be borne in mind.
Indeed he pointed out that there had been a plan in place to preserve the banks.
From the first use of a negative deposit rate, Denmark implemented a threshold for banks’ excess funds and required that they only pay the negative rate above that line. That didn’t diminish the effectiveness of the policy but meant bank profitability didn’t suffer unduly, he said……..Last year the Danish banking system had its most profitable year since 2008.
Sadly there were no such plans for the average Dane or as we should perhaps now call them banking serfs. There was some relief that they had not indulged in a dash for cash though.
What we didn’t know was where the boundary is, and the good news is that we haven’t found it,” Rohde said. “We haven’t seen any unusual rise in outstanding notes, the system is working the way we expected. Basically, it’s not different from having a low positive interest rate.”
The economy
Lars Rhode is keen to sing the praises of his policy.
One should acknowledge that monetary policy has supported growth and inflation to a large degree,
If it has done so then the prospects in Denmark must have been pretty grim as this is the latest outcome reported by Xinhua News.
Denmark’s gross domestic product (GDP) rose 1.2 percent in 2015 year on year, less than previous predictions, official data showed on Monday……..Moreover, the country’s GDP in the fourth quarter of 2015 increased by 0.2 percent compared to the previous quarter.
This was a disappointment compared to the 2% forecast by the central bank at the beginning of the year. It is also quite a contrast to the news from Sweden only yesterday and makes us wonder how much of the GDP growth there is due to the negative interest-rate policy which is seeing a quite different result in Denmark.
The unemployment situation is good compared to Denmark’s peers with yesterday’s update telling us that it is 4.4%. However if economic growth continues to underperform there must be doubts about this.
Employment is expected to rise by almost 65,000 from the 3rd quarter of this year to the 4th quarter of 2017,
What about debt?
On the surface the situation looks good because in terms of public debt the situation in Denmark is strong. Nonetheless it seems to be imposing a dose of austerity on itself as it again mirrors Euro area policy.
The agreed Finance Act for 2016 involves tightening of fiscal policy, which is appropriate in the current economic environment.
This gets more surprising as we note the actual situation according to the central bank.
The ratings are supported by the low government debt, which fell to 22 per cent of GDP in 2015 as a result of a government budget surplus.
Any problems are not being caused by the cost of borrowing either as it averaged 0.3% in 2015.
Also if we look to the external position then it looks strong too.
Since 1990, the current account of Denmark has shown a surplus, which is currently almost 8 per cent of GDP.
We have something awkward here because Denmark has in effect been exporting deflation for decades along the lines of the German economic model which provides another insight to an economic policy based on an exchange-rate. It would help its neighbours if it’s government borrowed a bit which it can do cheaply and it consumed and imported more.
Private debt
Here is a completely different emphasis on the so far parsimonious Danes. Here are some excerpts from the Financial Stability Report which highlight the issue.
Households have large debts, predominantly at variable rates of interest,
The accompanying chart shows a total just shy of 2 trillion Danish Kroner which is interesting as the Danish mortgage association thinks it is 2.5 trillion,still what’s 500 billion between friends? Also this is true.
The credit institutions have considerable lending to homeowners with high debt ratios. In this analysis, having a high debt ratio is defined as having debt that is larger than the value of the home and at least four times higher than the family’s annual income before tax….In 2013, the debt of homeowners with high debt ratios exceeded kr. 200 billion,
Typically the central bank is much more worried about the impact of this on the banks than it is on the borrowers or banking serfs.
Banks and mortgage banks have substantial direct exposures to the housing market. Their total domestic lending to households for housing purposes amounts to just under kr. 1,750 billion, or approximately 90 per cent of GDP.
If we move to the mortgage rate position then we see some intriguing trends. The short mortgage rate has veered as low as -0.32% but sometimes been positive but the long mortgage rate fell to 2.13% but then rose to 3.16%. No wonder the Danes have been remortgaging to lock in their position! These numbers are from the Danish mortgage association and only take us to November when there is some logic to the position as the Nationalbanken Forward Guidance was for interest-rate increases in yet another calamity for the concept. I suspect that the situation now is different.
Comment
To misquote the song there is nothing like a Dane! In central banking terms this may well prove to be true next week as they find themselves having to quickly reverse an interest-rate rise yet again! Even worse was the fact that back on the 8th of January they only had the courage to raise interest-rates by an inconsequential 0.1% where the costs of change surely outweighed the benefits. There will be no-one more interested in the news from the ECB next Thursday than the Nationalbanken in its bunker.
As to economic prospects we have seen more disappointing manufacturing surveys for the UK and the Euro area which poses a question for Denmark’s prospects. This adds to a disappointing trajectory and an odd mixture of flat-out monetary policy and the opposite in terms of fiscal policy. Even Mark Carney of the Bank of England is on the case.
Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect.
But I will leave you with two thoughts. Firstly whilst there have been some negative mortgage-rates in Denmark negative interest-rates have again coincided with some later rises in rates. Secondly they rely on the principle below that we can borrow from the future pretty much forever. How does that work exactly?
allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral.
Notayesmanseconomics's Blog 
Didn’t I read somewhere recently that the Dane’s were the world’s happiest people? Maybe not for long….
That great Danish comedian Sandi Toksvig lives in the UK I believe.Need we say more?
Hi thecrock and welcome to my corner of the web
There are various lists and I too recall Denmark leading one. I have checked the UN World Happiness Report which with the obvious caveat that they have a lot of variable for a simple emotion Denmark is 3rd and the Nordic nations score highly.
Click to access WHR15_Sep15.pdf
I thought quite a few in that part of the world were affected by the long nights of winter…..
kr. 1,750 billion or 90% of GDP
well thats all ok so long as you can afford the interest payments
for the GOP they can , they set MIRP/BIRP and majickally any money borrowed gets less over time …..
how kool is that ?
Forbin
Hi Forbin
Well at these interest-rates it can be afforded which is true if we add in the much smaller national debt. But of course we are left mulling the issues which this raises. Firstly can higher interest-rates be afforded? Secondly will they rise anyway as the banks look to make ever more money? Thirdly will the Danes borrow ever more and put them in a trap?
Meanwhile oil has been edging higher (Brent Crude is US $36.83) and it has risen more in UK Pound £ terms.
“The credit institutions have considerable lending to homeowners with high debt ratios. In this analysis, having a high debt ratio is defined as having debt that is larger than the value of the home and at least four times higher than the family’s annual income before tax”
And where are we , Shaun ?
Forbin
I think that you will find that lending more than the value of a home and four times salary is the true path to a sustainable economy.
What could go wrong?
It’s worked out so well for japan,who are we to argue against it?
Hi Shaun
With every day that passes it becomes ever clearer that NIRP is not merely a logical extension of existing policy tools but the last gasp of a defunct ideology.
The evidence is now pretty clear that NIRP doesn’t work and leads to unintended and perverse consequences which are only propelling the system to the next crash. Although there appears to be an element of doubling down this can only end one way.
There is a refusal to accept that the structural forces of demography are beginning to have a material economic effect and the “intertemporal adjustment” in demand leaves us nothing for tomorrow because we are steadily moving towards a lower consumption function as a society; however, sooner or later, our clueless masters will have to admit the truth.
Bobj,
We’re heading toward the steady state of economics – no more boom or bust but then no more growth
the sad thing is that the entire Western political/economic structure is based on never ending growth ( true its been a bumpy ride ) .
The shuffle of wealth upwards with no effective means of re-distribution back means that in the end we will end up with a feudal system – al la Dune perhaps.
As the system is unstable I cannot garantee that – the likely hood is a chaotic reset .
This is going to be quite the ride – Tron Legacy
Forbin
‘We’re heading toward the steady state of economics – no more boom or bust but then no more growth ‘
No boom,no bust,no growth,just permanent decline.Sounds so enticing.
‘The evidence is now pretty clear that NIRP doesn’t work and leads to unintended and perverse consequences which are only propelling the system to the next crash. ‘
Beautifully put Bob.Such insight won’t get you anywhere near the board of the BoE.
” our clueless masters will have to admit the truth.”
If only they would Bob. Unfortunately our masters are all descendants of either Lewis Carroll or Hans Christian Andersen.
And of course they don’t hang round long enough to be held accountable. They either move on to even more lucrative jobs or retire and write a book
Capitalism absolutely depends on growth; it is the eleventh marble.
The problem with these ultra-low or negative interest rates is that our great leaders have assumed that they would predictably achieve the reverse of high interest rates. After all, it is true that high interest rates in the past could be used to dampen down demand, encourage savings, support the currency and ultimately keep inflation in check. Now we have a position where politicians want to increase demand/inflation (and don’t care about savers) and have incorrectly assumed that the reductions in interest rates would have the desired effect.
Who would have believed ten years ago that:
1. Interest rates and inflation would be basically zero everywhere;
2. Central banks would have printed money on an epic scale;
3. The clearing banks (despite all the propping up) are dead men walking;
4. There would be lower GDP per head (over a ten-year period) in Italy/Greece (others?)
The result is that the politicians and central bankers actually have no idea what to do except to pass the grenade to the next generation.
Hi James,
I think a reduction in interest rates would indeed have the desired effect. But there’s a limit. And, based on 300 years of history, it looks like 2%. And as you say it’s all aimed anyway at trying to control demand, growth and especially inflation. Wherever did CBs get the idea that interest rates can be used to save banks from bankruptcy. Is this one of their famous ‘works in theory, but not in practice’ episodes? Now we look at the still-troubled banks and all the unintended horrific collateral economic damage and wonder how long this can go on.
Unfortunately, for CBs, the base rate is the major tool in the toolbox and therefore can be used for anything. As the old saying goes – give a kid a hammer and everything looks like a nail.
‘The problem with these ultra-low or negative interest rates is that our great leaders have assumed that they would predictably achieve the reverse of high interest rates.’
Too true.Clearly none of them served in the Military or they’d know that ‘assumption is the mother of all f*** ups’.
I would also refer to your point four and say that I suspect that decline will have been covered up by a rise in imputed rents.
UK GDP per capita….net migration 320,000 in 2015.Ssssh!
Hi Dutch
The official mantra is that the GDP per head numbers continue to improve. From last weeks GDP update.
It is a world trend to always look at dept. But this bloc forgets assets. Danes saves for their private pensions and when you can borrow money at 2% for a fixed 30 year mortgage loan most Danes have stuffed their pensions instead. We are serious net asset holders. The pensions are predominately invested in Euro countries. So losing the peg will almost instantly devalue the savings. Keeping the peg is protecting a 4 trill dk pension market. Denmark has abandoned the OECD norm of Pay As You Go, and the government knows it is owed 1.2 trill worth of unpaid taxes and pension gains will keep flowing in to the country at an increasing rate. The danish national banks governor Lars Rohde may be concerned, but do not expect any panic reaction by the ECB proclamation
Hi Jesper and welcome
Thank you for raising a point which I have mentioned before but failed to on this occassion. You are right to point out that Denmark has considerable pension savings invested abroad. However this is presumably for retirement unless Danes use them to repay mortgages? also there are issues.
1. Currency risk
2. Low returns on bonds with so many Euro area sovereign bonds offering negative yields.
3. I am not an expert on pension returns in Denmark but in the UK some pensions illustrations have a return rate per annum of -3% as one of the three levels.
In a world of negative interest-rates how does pension saving which by its nature is long-term work?
As central banks – together with their governments – limp and drag themselves toward the final resolution of their debt, the escape routes for savers and investors are reduced. Daily discussions are being held about higher denominational currencies, and paper shorts are used increasingly aggressively to hammer PMs.
‘No future, no future, no future for you’
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