Bloomberg News

Denmark’s New Government Pledges to Meet EU’s Deficit Limit

September 16, 2011

(Updates with bond yields, stock market in eighth paragraph.)

Sept. 16 (Bloomberg) -- Denmark’s Social Democrats, who will lead the country’s next government after winning yesterday’s election, vowed to show fiscal restraint and bring the country’s budget deficit within the European Union’s 3 percent threshold.

“We will spearhead a resurrection of Denmark’s economy and engage a fully responsible economic policy that meets all requirements, including the convergence criteria” set by the EU, Morten Boedskov, Social Democrat finance spokesman, said in an interview in Copenhagen yesterday.

The new government, which will be led by Denmark’s first female Prime Minister Helle Thorning-Schmidt, has pledged to spend 21 billion kroner ($3.9 billion) more a year than the outgoing administration of Lars Loekke Rasmussen had planned. Thorning-Schmidt, 44, campaigned on a platform of more taxes for the rich and more spending on schools and hospitals, policies Rasmussen warned will jeopardize Denmark’s AAA credit rating.

Denmark’s budget deficit will exceed the EU’s 3 percent limit and reach 3.8 percent of gross domestic product this year, before widening to 4.6 percent in 2012, the Finance Ministry said Aug. 24. The average deficit in the euro area will be 4.3 percent in 2011 and improve to 3.5 percent in 2012, according to the European Commission’s latest forecasts from May.

“We need to get the economy into shape and start growth,” Thorning-Schmidt said in an interview broadcast by TV2 today. “That’s what I’m preoccupied with morning, noon and night.”

Limited Scope

The Social Democrat-led bloc, which comprises four parties, will get 92 seats in the country’s parliament. Rasmussen’s Liberal-Conservative coalition and its allies will get 87 lawmakers.

“The scope for any further deterioration of the public finances is very limited,” Nordea Bank AB Senior Analyst Jan Stoerup Nielsen said in a note today. “In the longer term, there’s no guarantee that the Danish economy will keep its status as a safe haven.”

The country’s benchmark stock index slipped 0.2 percent, the only bourse in the developed world besides Iceland’s stock exchange to decline today. The Euro Stoxx 50 gained 1.4 percent.

The difference in yield between Denmark’s 10-year government bond and German bunds of a similar maturity widened a half basis points to 24.5 basis points as of 12:40 p.m. in Copenhagen.

Yields Vs CDS

The spread has averaged 21 basis points since the end of April, a narrower spread than that of any euro member. Still, credit default swaps on Danish five-year bonds have risen more than contracts on equivalent German debt. Danish swaps have surged 42 percent since the beginning of August, compared with a 29 percent rise for German contracts, according to CMA. Swedish CDS gained 23 percent in the period.

The new government, which will rule with the backing of the Socialist People’s Party, the Social Liberals and the Red Green Alliance, may struggle to get some of its policies through parliament. The Social Liberals, which won 17 seats, have said they won’t back Thorning-Schmidt’s plan to maintain the retirement age or keep in place the previous government’s strict immigration rules.

Still, the Social Liberals will be invited to join the new government, Boedskov said. Talks on forming a government will start today.

Housing Bubble

Denmark is Scandinavia’s worst-performing economy, after a burst housing bubble fueled a banking crisis and choked consumer spending. GDP will expand 1.25 percent this year, the central bank said this month. Sweden’s economy will surge 4.5 percent, Norway’s mainland output will grow 3 percent while Iceland’s GDP will expand 2.8 percent, according to the countries’ central banks.

The next government is unlikely to get enough support in parliament to push through a planned 6 billion-krone bank tax, according to Peter Straarup, chief executive officer at Danske Bank A/S, the country’s biggest lender.

The anti-immigration Danish People’s Party, which backed Rasmussen’s bloc, saw its support slip three seats, giving it 22 lawmakers in parliament.

“We’ll be a tough opposition party,” Danish People’s Party leader Pia Kjaersgaard said in an interview with DR.

After announcing the election on Aug. 26, Rasmussen evoked the specter of a deepening European fiscal crisis and warned voters they face a “clear choice: uncontrolled debt or sustainable welfare.” Thorning-Schmidt, the daughter-in-law of former U.K. Labour Party leader Neil Kinnock, said the same day the state needs to deploy more public funds, arguing that “without growth we can’t pay down our debt, and without growth there’s no money for welfare.”

--With assistance from Jonas Bergman and Frances Schwartzkopff in Copenhagen. Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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