Of Denmark its banks and negative interest-rates

The situation regarding negative interest-rates mostly acquires attention via the Euro or the Yen. If the media moves beyond that it then looks at Switzerland and maybe Sweden. But there is an outbreak of negative interest-rates in the Nordic countries if we note that we have already covered Sweden, Finland is in the Euro and the often ignored Denmark has this.

Effective from 8 January 2016, Danmarks Nationalbank’s ( DNB ) interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

Actually Denmark is just about to reach five years of negative interest-rates as it was in July of 2012 that the certificate of deposit rate was cut to -0.2% although it has not quite been continuous as it there were a few months that it rose to the apparently giddy heights of 0.05%.

In case you are wondering why Denmark has done this then there are two possible answers. Geography offers one as we note that proximity to the Euro area is associated with ever lower and indeed negative interest-rates. Actually due to its exchange rate policy Denmark is just about as near to being in the Euro as it could be without actually being so.

Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro area and participates in the European Exchange Rate Mechanism, ERM 2, at a central rate of 746.038 kroner per 100 euro with a fluctuation band of +/- 2.25 per cent.

Currently that involves an interest-rate that is -0.25% lower than in the Euro area but the margin does vary as for example when the interest-rate rose in 2014 when the DNB tried to guess what the ECB would do next and got it wrong.

A Problem

If we think of the Danish economy then we think of negative interest-rates being implemented due to weak economic growth. Well the DNB has had to face up to this.

However, the November revision stands out as an unusually large upward revision of the compilation of GDP level and
growth……… average annual GDP growth has now
been compiled at 1.3 per cent for the period 2010-
15, up from 0.8 per cent in the previous compilation.
GDP in volume terms is now 3.4 per cent higher in
2015 than previously compiled,

Ooops! As this begins before interest-rate went negative we have yet another question mark against highly activist monetary policy. The cause confirms a couple of the themes of this website.

new figures for Danish firms’ foreign
trading in which goods and services do not cross the
Danish border entailed substantial revisions

So the trade figures were wrong which is a generic statement across the world as they are both erratic and unreliable. Also such GDP shifts make suggestions like this from former US Treasury Secretary Larry Summers look none too bright.

moving away from inflation targeting to something like nominal gross domestic product-level targeting would be a better idea.

In this situation he would be targeting a number which was later changed markedly, what could go wrong?

Also there is a problem for the DNB as we note that it has a negative interest-rate of -0.65% but faces an economy doing this.

heading towards a boom with output above the normal level of capacity utilisation……….The Danish economy is very close to its capacity limit.

Whatever happened to taking away the punchbowl as the party starts getting going?

Oh and below is an example of central banker speech not far off a sort of Comical Ali effort.

Despite the upward revision of GDP, Danmarks Nationalbank’s assessment of economic developments
since the financial crisis is basically unchanged.

The banks

This is of course “the precious” of the financial world which must be preserved at all costs according to central bankers. We were told that negative interest-rates would hurt the banks, how has that turned out? From Bloomberg.

Despite half a decade of negative interest rates, Denmark’s banks are making more money than ever before.

What does the DNB think?

Overall, the largest Danish banks achieved their
best ever performance in 2016, and their financial
statements for the 1st quarter of 2017 also recorded
sound profits…………In some areas, financial developments are similar to developments in the period up to the financial crisis in 2008, so there is every reason to watch out for
speed blindness.

Still no doubt the profits have gone towards making sure “this time is different”? Er, perhaps not.

On the other hand, the capital base has not increased notably since 2013, unlike in Norway and Sweden where the banks have higher capital adequacy.

What about house prices?

Both equity prices and prices of owner-occupied
homes have soared, as they did in the years prior to
the financial crisis.

Although the DNB is keen to emphasise a difference.

As then, prices of owner-occupied homes in Copenhagen have risen considerably, but with the difference that the price rises have not yet spread to the rest of Denmark to the same degree. The prices of rental properties have also increased and are back at the 2007 level immediately before
the financial crisis set in

It will have been relieved to note a dip in house price inflation to 4.2% at the end of 2016 although perhaps less keen on the fact that house prices are back to the levels which caused so much trouble pre credit crunch. Of course the banking sector will be happy with higher house prices as it improves their asset book whereas first-time buyers will be considerably less keen as prices move out of reach.

In spite of the efforts of the DNB I note that the Danes have in fact been reining in their borrowing. If we look at the negative interest-rate era we see that the household debt to GDP ratio has fallen from 135% to 120% showing that your average Dane is not entirely reassured by developments. A more sensible strategy than that employed by some of the smaller Danish banks who failed the more extreme version of the banking stress tests.

A Space Oddity

Politician’s the world over say the most ridiculous things and here is the Danish version.

Denmark should cut taxes to encourage people to work more, which would increase the supply of labour and help prevent the economy from overheating in 2018, Finance Minister Kristian Jensen said…

So we fix overheating by putting our foot on the accelerator?


If we look wider than we have so far today we see that international developments should be boosting the Danish economy in 2017. This mostly comes from the fact that the Euro area economy is having a better year which should boost the Danish trade figures if this from the Copenhagen News is any guide.

Denmark has been ranked seventh in the new edition of the World Competitiveness Yearbook for 2017, which has just published by the Swiss business school IMD.

But if we allow for the upwards revision to growth we see that monetary policy is extraordinarily expansionary for an economy which seems to be growing steadily ( 0.6% in Q1) . What would they do in a slow down?

We also learn a few things about negative interest-rates. Firstly the banking sector has done rather well out of them – presumably by a combination of raising margins and central bank protection as we have discussed on here frequently – and secondly they did not turn out to be temporary did they?

Yet as we see so often elsewhere some events do challenge the official statistics. From the Copenhagen Post.

Aarhus may be enjoying ample wind in its sails by being the European Capital of Culture this year, but not everything is jovial in the ‘City of Smiles’.

On average, the Danish aid organisation Kirkens Korshær has received 211 homeless every day in Aarhus from March 2016-March 2017, an increase of 42 percent compared to the previous year, where the figure was 159.


Let me offer my deepest sympathies to all those affected by that dreadful forest fire yesterday.

12 thoughts on “Of Denmark its banks and negative interest-rates

  1. What would they do in a slow down?

    Hi Shaun,

    Perhaps it because the Gerry Mandered fake news GDP figure ? ie we’re staving off depression across the Western world style economies because the TBTF Banks are still in fact bust ?

    Denmark is just stuck in the middle – shame its a nice country with a good selection of micro-breweries .

    The housing boom ? dont the danes tax wealth ? make too much on the yer house and whammo – big tax bill? perhaps I have it wrong


    • Hi Forbin

      If Pwc are right the explicit wealth tax was scrapped but there is this.

      “Property owners are obligated to pay property value tax. Property value tax annually amounts to 1% of the value of a property up to DKK 3,040,000 and 3% of the value exceeding DKK 3,040,000. However, if the property was purchased no later than 1 July 1998, a deduction is granted.”

      The threshold is ~ £360k.

  2. Great blog as always, Shaun. It’s a pity the Eurostat data related to housing isn’t more timely and that we will have to wait until July for 2017Q1 data. If one looks at the annualized growth rate in housing prices for 2016Q4 over 2014Q4, Denmark is at 5.6%, a lot behind Iceland (11.1%), Sweden (10.3%) and Norway (8.5%), but not very different from the UK (6.1%), which everyone agrees has housing price concerns. How much comfort can the DNB take in the housing price boom being restricted to Copenhagen. Surely if there is a big housing price correction down the road to Copenhagen housing prices it will badly hurt the national economy.

    • Hi Andrew and thank you

      It is indeed a shame that these numbers only arrive with a long lag in terms of time. There are issues around the world with house prices in capital cities but this will only be made worse by negative interest-rates.

  3. Shaun, is the virus problem sorted? I ran a scan after last friday but didnt pick anything up – that doesnt mean I dont have one though! Any details on what virus it was?

    • Hi Pavlaki

      Apologies for any inconvenience, I am pleased you were not affected and I got the same result when I ran my anti-virus scan. There seems to be a generic issue with WordPress at the moment with pop-up advertising appearing on people accessing with either Facebook or on a phone. The “Happiness Engineers” say they are looking into it.

      • There is malware targetting linux too. Whatever you use, keep it updated. It is good practice to use a restricted account – don’t use root / administrator for surfing.

  4. When I think about your various excellent articles over a period of time, I cannot help coming to the following conclusions:
    1. The obsession with GDP data to a fraction of a per cent. is undermined by numerous adjustments. These fall broadly into two categories:
    a) The difficulty of collecting data, plus the fact that the data are extrapolations of samples, leading to frequent late adjustments; and
    b) Government manipulation/ insanity, such as including drugs/ prostitution (with obviously no idea what the figure is) and the crazy inclusion of imputed rents.
    2. QE has:
    a) Distorted the interest rate spectrum across the globe, ruining pension provision, allowing governments to borrow at crazily low rates;
    b) Inflated asset prices, which makes those who own them feel richer and those who don’t more excluded. It also stops the banks going bust.

    The problems with QE are:
    1. No-one has any idea how to reverse it, as people and governments have budgeted for very low interest rates and a move higher would cause serious difficulties for both;
    2. It has severed the link between tax, expenditure and borrowing, where higher expenditure without tax used to force interest rates up.

    We have therefore moved into an era where all economic text book theories are simply irrelevant. The consensus used to be that any form of printing money (see Weimar republic or Zimbabwe) would lead to a currency collapse. The moment that this consensus was proved wrong by the non-collapse of the dollar/Euro/Sterling/Yen, then all bets are off. Interest rates collapse, irrespective of the state of the economy (see Denmark above), an asset bubble is created, the banks are saved (temporarily) and governments can spend what they like.
    I don’t really see how this is going to end happily…

    • Hi James

      The GDP issue is made a mockery of in my view by this 3.5% adjustment in Denmark. Imagine if they had been using nominal GDP targeting! This of course only adds to other large revisions elsewhere. It reminds me of Forbin’s point that maybe these days we need 2% claimed economic growth for the ordinary person to feel anything.

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