The impact of negative interest-rates on the economy of Denmark

Whilst so much of the media and indeed the world were focusing on the travails of my old employer Deutsche Bank yesterday something else significant sneaked under many radars. This was the International Monetary Fund lecturing Switzerland on the subject of negative interest-rates as you can see below.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

A rather flowery way of suggesting an interest-rate cut from the present -0.75% which is reinforced here.

Some widening of the current effective interest rate differential—either by lowering the exemption threshold or the marginal policy rate—could therefore be considered to reduce the frequency of small-scale interventions.

So the IMF would prefer that Switzerland cut its interest-rates again further into negative territory rather than intervene in foreign exchange markets. That is intriguing on two fronts and the first is the fact that it is tempting it to test where the lower bound is which I shall define as the point at which bank depositors switch to cash. The second is that it is setting interest-rate for foreigners and foreign investors rather than the domestic economy. Indeed for the domestic economy there is potentially trouble ahead according to the IMF.

Sustained low interest-rates could raise financial stability risks……..Elevated household debt and banks’ concentrated exposure to mortgages could be key amplifiers in the event of macroeconomic shocks .

Reality for Denmark

This made me think of the country which has had negative interest-rates for the longest as Denmark plunged into that icy cold world in early July 2012 when it cut to -0.2%. They have been there since apart from a brief foray to the not so giddy heights of 0.05% in late spring and summer 2014. Also if the IMF view extends to other countries which set their interest-rate more for the foreign exchanges than domestic demand there might be another reverse ferret on its way.

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

As it was nobody was expecting an end to negative interest-rates anytime soon according to the Nationalbanken or DNB.

The implied overnight interest rate does not reach 0 per cent until in four years

The ordinary experience

This is for borrowers as follows according to the DNB.

Viewed over a longer period, there has generally been close to full pass-through from the rate of interest on certificates of deposit to the banks’ lending rates.

We note they took their time and wonder about how we define close but okay. However the experience for the ordinary depositor remains different.

The banks have been hesitant to pass on the negative rate of interest at Danmarks Nationalbank to small enterprises and especially to households. The latter have been completely exempt from negative deposit rates.

I have wondered along the line of the lyrics below about this.

How long has this been going on?
How long has this been going on?

As far as we can tell banks will continue to resist passing on negative deposit rates to the ordinary investor. However businesses are not exempt as some 30% of deposits are and I have pointed out the dangers to long-term business models from them.

Negative deposit rates are in widespread use for insurance and pension companies, for which the alternatives to bank deposits are placement on money market-like terms, e.g. in short-term securities, likewise at negative rates of interest.

Actually it would now appear that the pension industry likes very few potential futures.

Some pension companies have reported to the Danish Financial Supervisory Authority that substantial interest rate hikes would be the worst scenario imaginable for them.

Mortgage Rates

The Danish Mortgage Bank data is delayed but in week 22 of 2016 then the average short-term rate was -0.23% in Danish Kroner and -0.13% in Euros. The long-term rate was 2.65%.

Any signs of trouble?

If we were to find any they would be found in asset markets of which the likeliest is house prices. On that I noticed this in the DNB Monetary Review.

Since March, the yield on mortgage bonds has fallen more sharply than the yield on government bonds,

Rather awkwardly the rally was driven by foreign investors noting that the ECB (European Central Bank ) is buying such bonds ( covered bonds) in the Euro area making the Danish variety look more attractive. So what about the housing market.

Let me hand you over to a report earlier this month from the DNB which opens with an official denial of what Taylor Swift would define as “Trouble,Trouble,Trouble”.

Although house prices have risen considerably over the last 3-4 years, there are no indications that the Danish market overall is experiencing a speculative house price bubble.

Ah so over the period of negative interest-rates! In case you are wondering about the overall state of play here it is.

But today’s annual increases of 4-5 per cent do not indicate a bubble.

However it has been ” Wonderful! Wonderful! Copenhagen” for those who have invested in property there.

However, price increases in Copenhagen have been so persistent and strong that the development could be consistent with a bubble according to the test, just as in the mid-2000s……. So Danmarks Nationalbank finds that there is reason to monitor developments in Copenhagen closely.

So we learn that monitoring closely is one step up from being “vigilant” in central banker speak. Also those who want to buy in Copenhagen must feel excluded in many cases.

The Real Economy

This has been troubled during this period but has so far in 2016 seen a better phase recording quarterly GDP growth of 0.7% and then 0.5%. But considering the monetary stimulus the forecasts are hardly stellar.

Danmarks Nationalbank expects the gross domestic product (GDP) to grow by 0.9 per cent this year, rising to 1.5 and 1.8 per cent, respectively, in the next two years.

However according to the Governor there may well be trouble ahead.

“We expect the economy to reach its normal capacity level as early as 2018. Conducting expansionary fiscal policy well beyond that point is risky, especially if interest rates continue to be very low. There is a risk of overheating and economic imbalances, which it may be necessary to take measures to prevent,” says Lars Rohde.

He also thinks that fiscal policy needs tightening which means that the current establishment memo seems to have forgotten to be sent to Denmark.


There is much to consider here. Firstly I think that advocates of monetary stimulus have to conclude that the effect on economic growth has disappointed. Denmark has simply not had much and if you factor in the lower oil price it has not done well at all. As to specific news we have reports in the Copenhagen Post of businesses bring production home but also the problems of world shipping are affecting Maersk on the other side of the coin.

Meanwhile we are seeing another move higher in house prices which has even the central bank getting out its slide rule for bubbles! I also note it seems to be hinting/asking for higher taxes on property. On that front well as we see yet another record low for the 2 year bond yield of Germany as it get safe haven flows because of the problems of Deutsche Bank  we may yet see more downwards pressure on interest-rates and yields. Oh and as Elton John put it “Please don’t shoot the piano player” about the last sentence.

Something rather familiar to UK and US readers is found in Denmark which is that employment has done better than GDP growth which raises a familiar concern and theme.

Productivity growth in the Danish economy has been weak in the wake of the financial crisis. This is especially the case from the 2nd half of 2015 and onwards when the decoupling of output and the labour market situation calls into question future productivity growth and the actual sustainability of the growth in employment seen during the last year or so.

Share Radio

I was interviewed on the evening show by Simon Rose yesterday.



Are mortgage rates in Denmark part of a “mad world”?

This morning has started with a familiar drum beat for these times as we see higher bond prices in Japan and the consequent record lows in yields.

The 10-year JGB yield edged down half a basis point to minus 0.160 percent, after earlier setting a record low of minus 0.165 percent…..The 20-year JGB yield also set a fresh record low of 0.180 percent, shedding 1.5 basis points, as did the 5-year yield, dropping half a basis point to minus 0.275 percent .

As prices are going “higher and higher” and yields “Fallin’ ” we are now seeing consequences for the ordinary man and woman and the obvious place to look for this is Denmark. You see it has the longest history of official negative interest-rates with the certificate of deposit rate being cut to -0.2% on the 6th of July 2012 and being -0.65% as I type this. So we about to see four years tick up albeit with a brief spell in 2014 when the rate was raised to the apparent heights of 0.05%. Oh how the Nationalbanken must wish it could erase evidence of that move! As it was wrong footed by a policy change at the European Central Bank with more deception than any player I have seen so far at the 2016 European championships.

Such a thing is especially troubling as we mull how many central banks have started tightening cycles only to find that they cut again and in Denmark’s case to record lows. Although right now it is at -0.65% so just above the nadir of -0.75%. That is quite a contrast to the “expert” view which has had a consensus that negative interest-rates were not going to last long.

Mortgage Rates

This is one of the ways we can investigate the impact on the ordinary Dane and there are new developments in this arena.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

As you can see the Danish mortgage borrower can borrow as cheaply as the US Government and if the coupon drops to 2% well they can borrow more cheaply than the UK government over a 30 year period. So the ordinary borrower has the potential to lock in very low levels for mortgage-rates over a 30 year period in which case this particular shadow of the credit crunch era will stretch to at least 2046.  From the way the article is written 2% seems not far off a done deal if 1.5% is also in prospect,although the later feels subject to some hype.

As to whether the Danes will respond well the answer seems to be yes if last year was any guide.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float……Fixed-rate loans now make up about a third of Danish mortgage lending.

Oh and as to the below isn’t everything these days? The emphasis is mine.

The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

I do not know about you but the statement below seems to be rather tempting fate.

What’s more, borrowers can’t walk away from their debt.

Negative Mortgage Rates

There has been a lot of speculation and hype about this but the Danish Mortgage Bank Association keeps a weekly record of the yields on Danish mortgage bonds. The short-term rate for Kroner mortgage bonds was last at -0.23% and has been negative for all but two weeks in 2016. If we move to Euro mortgage bonds as we recall the Krone is pegged to the Euro then the yield on short-term mortgage bonds was last -0.13% and it has been negative for all of 2016 so far.

Back in April the Wall Street Journal was on the case.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

If only his name had been Hans Christian Anderson…

House Prices Rise

Even the IMF is on the case.

Fueled by historically-low interest rates, house prices have risen rapidly in recent periods—especially for flats and in Copenhagen……..the market bears close watching since a continuation of the uptrend would soon bring real house prices in these segments back to pre-crisis levels.

The data is delayed but the owner occupied flat index was up 9.2% in the year to March. The Nationalbanken suggests that the only way is up baby.

expectations of further positive developments in the housing market.

First-time buyers will of course have reason to disagree.

The debt problem

The IMF tried to sweep this issue under its carpet.

and the absence of an attendant rapid build-up in household debt.

That seems fine except if we note this from the Danish mortgage association.

The market value of all Danish outstanding mortgage bonds (traditional mortgage bonds, covered bonds and covered mortgage bonds) exceeds DKK 2,300bn (app. EUR 310bn). The Danish mortgage bond market is actually more than four times larger than the Danish government bond market. The market value also exceeds total Danish GDP.

Sadly it is out of date in terms of data however i helped out a bit on August 24th last year.

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


There is much to consider here but whilst the mainstream media continues of course to blame this on the Brexit referendum there is a culprit even closer to home. The Nationalbanken pegs the Krone to the Euro which means that Danish securities and an extremely close proxy for Euro area ones whilst the peg holds. The consensus view on the peg  is given by Bloomberg.

The man running Denmark’s biggest pension fund is convinced nothing can break the country’s euro peg.

This means that the 172.2 billion Euros of the third phase of the ECB’s covered bond purchases will have a strong effect on Danish covered bond prices and yields too. Odd that this is missed and of course there will also be an impact from the new corporate bond program which is doing this today.

ECB out again this morning buying more short end autos, 2-3y Chem names & 7-10y Pharma names (@creditmacro )

What could go wrong?

Also with the strong influence of the housing market on the economy of Denmark you might think that the economy would be surging, certainly economics 101 tells us that. But the last 3 quarter have gone -0.6%, 0.1% and then 0.5% so an improving trend yes but just under flat overall. If we look bank the Nationalbanken notes a credit crunch era of relative underperformance.

The low rate of growth in Denmark is to a large extent attributable to weak domestic demand.

On the other side of the coin Denmark does have substantial pension fund assets. How are they going though in a negative interest-rate world…..

Time for Tears For Fears or more recently Gary Jules.

When people run in circles it’s a very very
Mad world
Mad world
Mad world
Mad world




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.

Sweden and Denmark are offering an Alice In Wonderland future for monetary policy

Often we are told in Britain of the Scandanavian nations and Sweden in particular setting a good example and they are regularly held up as a model to follow. This particularly happens in the areas of social policy and education. However the last year or so has seen developments in monetary policy which has had me musing if they are setting a template for the future for all of us. This is in the area of negative interest-rates and expansionary monetary policy when you have an economy which is expanding and indeed booming. This is an inversion and some would say perversion of monetary policy theory where a central bank is supposed to lean against trends rather than give them a further push!

Denmark provides an example of this if we examine the situation described in the latest monetary review of its central bank the DNB. A Martian economist might think that things were going well at this point.

GDP growth in Denmark is expected to be 2.0 per cent this year and to remain at that level in 2016 and 2017. The projection thus reflects continuation and strengthening of the upswing that has already been underway for some time.

However our Martian economist will be scratching his or her head a little at this bit.

(The DNB) reduced the rate of interest on certificates of deposit on four occasions in January and early February, to -0.75 per cent. This is an all-time low for a Danish monetary policy interest rate.

The combination of solid growth with little or no consumer inflation might seem like not far off economic nirvana so why mess with it? We are seeing domestic policy in Denmark being made subservient to the exchange rate which is pegged to the Euro. A type of competitive devaluation our Martian might think should he or she be aware of the 1920s and 30s. Also our Martian would exclaim “you don’t say!” at this bit.

there is a risk that a prolonged period of very low interest rates will trigger an unhealthy development with self-reinforcing price rises for owner-occupied dwellings.

Ah a house price boom, what could go wrong? For now Denmark has a monetary environment where many mortgage bonds trade at negative yields and where households are unsurprisingly keen to remortgage.

indicating that the volume of remortgaging is exceptionally high, as was also the case last quarter.

So Denmark has potentially sacrificed balance in its internal economy on the altar of keeping its Krone pegged to the Euro. Unless of course you think that issuing Treasury Bills at -0.98% as it has done this morning – yes the investor and not the government is paying interest – is (the new) normal.


This is an even more extraordinary development as it has not been forced down this particular path by a type of fixed exchange-rate policy. Indeed as it is supposed to have a central bank accused of being “sado-monetarists” by Paul Krugman you might wonder  even more about its current path. Back on February 11th they made a move which would confuse our Martian economist even more which I described the next day as this.

This is very significant as imagine if growth happens as they anticipate and inflation does pick-up at the policy horizon of circa two years then they have just made completely the wrong move!

They moved into negative territory with interest-rates cut to -0.1% but in a Krugmanlike state of mind they decided that not only this but some QE was required as government bond purchases were announced. Only a fortnight or so later we discovered that economic growth was running at an annual rate of 2.7%. So very strongly pro-cyclical monetary policy as they add a supercharger to an engine that was already turbocharged!

What happened next?

There was another cut to -0.25% on UK Budget Day  as our Martian looked for some headache pills to stop his or her brain hurting. Now let me bring you fully up to date with some news from Sweden Statistics from this morning.

In March the annual growth rate for lending to households increased by 0.2 percentage points, from 6.2 percent in February to 6.4 percent in March.

As you can see the fear I expressed for Denmark seems to be bubbling along in Sweden and our Martian’s alarm would rise if we narrow our focus.

Housing loans account for 81 percent of total lending to households, and increased by SEK 160 billion to SEK 2 526 billion. The annual growth rate was thus 6.8 percent in March.

This boom has been at least partly caused by the fact that mortgage-rates are very low and have been falling. The numbers below compare to 2.43% a year ago.

Households’ average interest rates for housing loans for new agreements from MFIs fell from 1.81 in February to 1.74 percent in March.

Rather then being middle of the road that seems “chirpy,chirpy,cheap,cheap” to me and it would appear that Swedish companies think so too.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.

So there you have it a housing market which is being pumped up and a money supply which is either growing at an annual rate of 13.8% (M1) or 7% (M3). If we take a rule of thumb for wider monetary growth of 7% we subtract expected economic growth of 3% and get inflation of 4%. Thus a central bank of “sado-monetarists” would be singing along with Dawn Penn.


The Riksbank this morning

Firstly it confirmed its view that the outlook is bright from its eyrie by upgrading its economic growth forecasts.

The expansionary monetary policy is having a positive impact on the Swedish economy…….GDP growth in Sweden is good and the labour market is continuing to improve.

Thus our Martian looking at surging money supply growth and in particular lending for mortgages and housing would be expecting a tightening of policy. But instead rather than an economics text-book it would appear that the Riksbank has been reading Alice In Wonderland recently.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

So rather than a tightening we got an expansion.

the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.

Also a hint of more interest-rate cuts combined with a Forward Guidance style promise of lower interest-rates for longer.

In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further.

And in a Mad Hatter style panic they appeared willing to throw the kitchen sink at things.

The Riksbank is also prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market………..Purchases of other assets than government bonds are also a possibility.

I think that in terms of possible monetary expansion that is about it, for now at least! Although for some who had in my opinion really got carried away with their rhetoric that fact that there was not an interest-rate cut today was a surprise. Of course Lewis Carroll got there first.

Why, sometimes I’ve believed as many as six impossible things before breakfast.


There is much to consider at the moment from monetary policy in the Nordic regions but I am afraid that not much of it is good. Sweden in particular but Denmark too seem set on a helter-skelter type monetary policy where the economy is sacrificed to the growth now gods with this sort of perspective about time.

Alice:How long is forever? White Rabbit:Sometimes, just one second.

You have to ask what is the Riksbank of Sweden afraid of? If we are being told the truth about the Swedish economy,it is time for it to be reminded of the words on the front of the HitchHikers Guide to the Galaxy which in big friendly letters says.


Meanwhile the Bank of England may be observing a far slower quarterly GDP growth rate of 0.3% and think it is missing out on this fashion for negative interest-rates! Especially if the current rally in the UK Pound continues (US $1.53+,1.40 versus the Euro,182 Yen). at which point in my opinion the Nutty Boys should be on repeat.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain

Denmark tries to face its currency demons but what about its household debt?

One of the features of the credit crunch era has become the way that the economic landscape has become marred by similar moves to the competitive (currency) devaluations which so marred the 1920s and 30s as they became factors in the Great Depression. When the phrase “Currency Wars” was first used by the Brazilian Finance Minister back in 2010 the main issue was the impact of US Dollar moves. However now we find ourselves in a situation where two major currency blocs have devaluation as a policy with one being explicit and the other more implicit. The explicit player has been Japan under the banner of Abenomics as it has pushed the value of the Japanese yen lower. No doubt Japan’s establishment will be crowing today as the Nikkei 225 equity index reaches 18,466 which is a closing level not seen since May 2000. If only the real economy was the same! However I wish today to look at the implicit devaluer which is the Euro and the implications of that which have emerged for the nations attached to it and in particular Denmark.

Why is the Euro an implicit devaluer?

The European Central Bank now has a flagship policy of 60 billion Euros a month beingspent on Euro area bonds or Quantitative Easing. So far only a small frigate has gone ahead of the main fleet as relatively minor purchases have been made. But the supporting references are full of euphemisms about boosting inflation which is most easily done via a lower exchange rate and in particular a lower exchange-rate against the US Dollar. Odd that this does not get any mention don’t you think??!

Rather ironically if there has been a boost to inflation it has come from the rebound in the price of oil (Brent Crude) to around the US $60 per barrel level! But the oil price is very volatile as we await the next move. If we return to the Euro I also note that after a fall it has now stabilised. If we compare it to the Yen then after pushing through 145 into the high 140s in early December the Euro fell to around 135 where it now remains. The initial response to the flagship QE announcement was for the Euro to fall but now it is at 1.13/14 pretty much back where it started.

A problem for Denmark

As the Euro has moved into a phase where the ECB is implicitly encouraging it to fall pressure has come on Denmark which is not in the Euro but instead pegs the Krone to it in a 2.5% band. The Danish elite argue that this brings the benefits of being in the Euro whilst avoiding some of the problems. Before this is over I suspect that the Danish people will wonder exactly what the benefits were.

In an attempt to keep the Krone within its band the Danish central bank has found itself cutting interest-rates four times already in 2015. After initially dipping its toe into the world of negative interest-rates in a similar fashion to the ECB (-0.2%) it then went to -0.35%,-0.5% and then -0.75% in even more extreme attempts to maintain an exchange-rate status quo. In addition to this it spent some 106.5 billion Krone in January trying to keep its price down. We can conclude that even the Nationalbanken did not think the intervention was a success as otherwise it would not have continued its series of interest-rate cuts. In addition it suspended government bond sales to try to halt flows into the Krone.

What about the Danish economy?

What I mean by this is that if you deploy monetary policy to deal with the external constraint or exchange-rate it is not available to deal with internal economic issues. Of course on rare occasions they may coincide so let us investigate. From the December International Monetary Fund staff report.

Danish household debt is the highest among the OECD countries, standing at about 300 percent of disposable income.

So we have an immediate problem as the conventional response to high debt levels is to try to reduce them rather than encouraging even more borrowing via ever lower interest-rates! As we look deeper more issues emerge.

The recent upward trend in household debt started in the late 1990s, reaching 300 percent of disposable

income by 2008. This coincided with the period of rapid house price appreciation that peaked in 2007. The housing boom eventually ended with large house price corrections, but household debt remains elevated with only moderate deleveraging having taken place so far.


As you can see there are a multitude of issues here. The concept of a house price boom based on a debt expansion seems much more southern than northern european in terms of stereotypes although as I have discussed before the Netherlands is in a similar boat. The official response is that the debt is backed by solid household assets.But whilst bricks and mortar are solid in a physical sense the financing around their valuation starts to look much more like a house of cards. Denmark’s private-sector has assets but the housing stock is something that can only be realised relatively slowly and the pension system is supposed to be for the future rather than the present except on a more minor scale. So liquid debts and illiquid assets what could go wrong?

Especially if we now see a surge in borrowing at these negative interest-rates as over time they seep through the Danish financial system. To be more specific I expect different impacts from different groups as some expand their debt and other continue to deleverage although the latter impact has so far been small according to the IMF.

Also I spotted that phrase which brings terror to those who have examined the Irish experience, mortgage product innovation.

“Interest only” (IO) loans—these are called deferred amortization loans in Denmark as they normally

come with a deferred amortization period of up to 10

years—were introduced in 2003, …..The use of deferred amortization loans grew rapidly since then, and these loans account for a little over half of outstanding loans by MCIs in recent years.


What could go wrong?

Are capital controls a sign of desperation?

I think that the hint in this area which was released on Friday is exactly that. In case you have not read it here are te full developments. From Bloomberg today.

In reports by Reuters and the Telegraph, Hans Joergen Whitta-Jacobsen, the head of Denmark’s Economic Council, is quoted as saying the country could impose capital controls. Whitta-Jacobsen, who doesn’t advise the central bank, has since said he doesn’t think such a measure is necessary or likely.


Never believe anything until it is officially denied ( Otto Von Bismarck and Jim Hacker).

Also the denials come with claims that capital controls would be illegal which seems odd when you consider that Cyprus which was in the Euro area suffered from them.



There is much to consider here as we see a central bank wedded to a pegged exchange-rate. Firstly can it keep the peg? Probably not as I expect the Euro situation to rumble on. Of course events will ebb and flow and on the better days we can expect many establishment cries of triumph. However the hint of capital controls may well have been a type of ” Open Mouth Operation” from an increasingly desperate Danish establishment. On the day it worked as the Krone plunged but there will be other days.

On the other side of the coin there is the situation regarding household debt, mortgages and the housing market. There are genuine fears about what may now happen here as puncturing a bubble with negative interest-rates is pretty unique or to use a word much abused in the credit crunch era innovative.

Meanwhile Denmark appears to be offering something to the world of football which is arriving in the UK at Brentford football club which with apologies to its supporters seems unusual to say the least. From the Guardian.

What Quinn may not realise is that the blueprint for Brentford’s future is already being stress-tested 800 miles away at FC Midtjylland, who lead Denmark’s Superliga by six points and are on course for the first trophy in their history. And who is the majority shareholder in Midtjylland? Matthew Benham, the former hedge fund manager and professional gambler who also owns Brentford.