The Danes’ Subzero Rate Adventure

Denmark is using negative interest rates to discourage outside capital | “This is good; we have a luxury problem”

Christian Wienberg, Frances Schwartzkopff, and Tasneem Brogger


Plenty of central banks around the world have cut rates almost to zero. Denmark has been even bolder: On July 5 the central bank cut deposit rates to minus 0.2 percent (that’s the rate offered to banks that want to park their funds at the central bank). Earlier, in June and July, Denmark had sold two-year debt with negative yields ranging from minus 0.05 percent to minus 0.08 percent. The country is making banks and investors pay for the privilege of converting their money to kroner. Switzerland, Germany, and France have all sold debt with negative yields recently.

Denmark’s currency is pegged to the euro. That makes sense, since the Danes mainly trade with countries in the euro region. The peg minimizes disruptions in trade by keeping the two currencies closely aligned. Now Denmark is struggling to keep the peg intact as investors flee the euro area for safer countries. Along with Sweden, Denmark is a favorite destination. Its current-account surplus, which measures trade and investment flows in and out of a country, reached a record high in May of 13.7 billion kroner ($2.3 billion) as the scared money poured in. All that foreign capital has put upward pressure on the krone: Though it’s still unlikely to happen, the fear is that Denmark would have to abandon the euro peg. In that case the krone would appreciate in value and the country’s exports would suffer. Negative rates are the Danes’ answer. They’ve already had an effect. The central bank’s deposit facility had 147.5 billion kroner as of July 10. On July 4 it was 186.3 billion.

Denmark’s economic virtues have gotten it into this peculiar situation. “This is good; we have a luxury problem,” says Jacob Graven, chief economist of Sydbank. The economy is diversified: Denmark sells pharmaceuticals, farm products, green technology, shipping services, and more, so it’s not reliant on only one or two industries. Although unemployment has crept up to 6 percent because of trading partners’ woes, that’s far below the double-digit rates in Spain, Ireland, and Greece. Its sovereign debt, at 40 percent of gross domestic product, is less than half the average for member states of the euro area. While the country’s budget deficit this year is expected to be just over 4 percent of gross domestic product, the European Commission has estimated it will drop to 2 percent in 2013. A recent banking crisis has been limited to regional lenders, and its impact pales in comparison with the pain Spain and Ireland have undergone from their own banking travails.

One of the strongest factors in Denmark’s stability is its tax system, which taxes individuals heavily according to income. Danes, thinking they get a good deal in terms of social services, pay up. The result: Denmark’s tax burden, including sales tax and other levies, is 48.2 percent of GDP, the world’s highest rate, but its budget is sound.

What comes next for Denmark is anyone’s guess. If the euro crisis worsens, foreign capital may keep pouring in, negative rates or no. Says Ian Stannard, chief European currency strategist at Morgan Stanley in London: “For an international investor with euro zone exposure, buying Danish assets can be a hedge against the extreme scenario of the euro breaking up.”

The bottom line With low national debt, a manageable budget deficit, and a diversified economy, Denmark qualifies as a haven for investors.


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