Bloomberg News

Thorning-Schmidt Wins Danish Election After Vowing to Spend

September 16, 2011

(Updates to add final vote count in second paragraph, today’s bond yield spread in eighth.)

Sept. 16 (Bloomberg) -- Helle Thorning-Schmidt will become Denmark’s first female prime minister after promising voters more welfare spending in exchange for higher taxes.

Thorning-Schmidt’s Social Democrat-led bloc will have 92 lawmakers in the country’s 179-seat parliament, broadcaster DR said, after all votes were counted. Outgoing Prime Minister Lars Loekke Rasmussen’s group will have 87 seats. The result was narrower than polls had indicated, with the average of more than 100 Gallup Denmark polls in newspaper Berlingske giving Thorning-Schmidt a nine seat lead.

“Today is the day things change in Denmark,” Thorning- Schmidt, 44, said at a party rally in Copenhagen. “This evening we’ve shown that the Social Democrats are a big and driving force in Denmark. We’ve written history today.”

The Social Democrats ended a decade of Liberal-Conservative rule after promising to raise taxes for banks and the wealthy to help pay for better schools and hospitals. The new government has pledged to spend about 21 billion kroner ($3.9 billion) more a year on welfare than Rasmussen’s bloc had promised. The policies will put pressure on AAA rated Denmark’s public finances and threaten the country’s haven status, Rasmussen, 47, has warned.

Addressing Deficits

His bloc’s election defeat means the government must now submit its request to Queen Margrethe II to seek formal resignation, Rasmussen said. “Danish voters have spoken,” he said. Rasmussen’s party will remain the biggest in parliament with 47 seats.

Thorning-Schmidt has assured voters her economic plans won’t hurt Denmark’s fiscal stability, and argues that jump- starting household demand is the best way to safeguard growth and welfare.

“Of course we have to address the deficit if we win,” she said earlier this week.

The yield difference between Denmark’s 10-year bond and German bunds of a similar maturity narrowed to 21 basis point points today from 22 yesterday. The spread between Danish and German 10-year debt is smaller than the yield difference for any euro member.

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.

Coalition Split

Still, the Social Liberals will be invited to join the new government, Morten Boedskov, Social Democrat finance spokesman, said in an interview in Copenhagen.

The Social Democrats lost one seat versus the 2007 election, giving the party 44 lawmakers, while the Socialist People’s Party sank seven seats to 16. The Social Liberals and the Red Green Alliance both gained eight seats versus the last election.

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.

“I’m not overly concerned,” Straarup said in Stockholm yesterday. “They will have to rely on the Social Liberal Party, which has a very healthy view on taxation, and there is no way they will be able to do this.”

Economic Laggard

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 broadcast by DR.

Denmark is Scandinavia’s worst-performing economy, after a burst housing bubble fueled a banking crisis and choked consumer spending. Gross domestic product 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.

Denmark’s budget deficit will reach 3.8 percent of GDP this year, and widen to 4.6 percent in 2012, the Finance Ministry said Aug. 24. The average shortfall 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.

Credit Default Swaps

The new coalition will strive to bring the budget deficit within the European Union’s 3 percent threshold of GDP, Boedskov said.

The difference in yield between Denmark’s 10-year government bond and German bunds of a similar maturity 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 49 percent since the beginning of August, compared with a 33 percent rise for German contracts, according to CMA. Swedish CDS gained 35 percent in the period.

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 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.”

“Under the opposition’s plan Denmark’s public sector will grow and there are some unanswered questions about the full financing of the measures,” said Steen Bocian, an economist at Danske Bank A/S, Denmark’s largest lender. “The government’s plan is more complete from an economic point of view.”

Thorning-Schmidt, who lost the 2007 election to Rasmussen’s predecessor, Anders Fogh Rasmussen, is the daughter-in-law of former U.K. Labour Party Leader Neil Kinnock.

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporters on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net; Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

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


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