Bloomberg News

Europe Risks ‘Japanese Scenario’ Amid Crisis, Denmark’s ATP Says

October 13, 2011

Oct. 13 (Bloomberg) -- Europe is heading for a “Japanese scenario” with asset prices and interest rates falling as economic growth remains subdued, according to ATP, Denmark’s biggest pension fund.

“The risk that we’re moving toward a Japanese scenario is increasing as deleveraging curbs economic activity, asset prices and interest rates,” ATP Chief Investment Officer Henrik Jepsen said in an interview. “We can’t rule out a deep recession and on the other hand we cannot rule out the chance of politicians suddenly coming up with a solution to the debt crisis. But it’s probably most likely that we will avoid the worst and keep bumping down the road in a low-growth scenario.”

The 711 billion-krone ($130 billion) fund altered its allocations this year to safeguard investments, cutting riskier bets in all asset classes, including commodities, government bonds and equities, he said. The benchmark Stoxx Europe 600 Index tumbled 26 percent from this year’s high in February through Sept. 22 amid growing concern the sovereign debt crisis is derailing the economic recovery.

“Europe is the decisive factor,” Jepsen said. “A recession in the U.S. or a hard landing in China are both bad, but there are more elements to the European crisis, including securing the trust in the financial system and preventing spillovers.”

German, French Pledge

As the crisis continues to engulf the euro region and threatens its banks, German and French leaders pledged on Oct. 9 to devise a plan to recapitalize lenders, help Greece and strengthen economic governance. German chancellor Angela Merkel, after meeting French President Nicholas Sarkozy, said Europe will do “everything necessary” to ensure that banks have enough capital.

The value of pension commitments at ATP, the second-biggest Nordic investor after the $553 billion Norwegian Government Pension Fund Global, rise by 74 billion kroner for every 1 percentage-point drop in Danish swap rates, Jepsen said. The two-year swap rate fell to 1.58 percent from 2.68 percent in April, according to data compiled by Bloomberg.

An increase in commitments reduces the fund’s liquidity and underscores the need to buy options as insurance. ATP uses options to protect against losses on oil, commodities and equities and prefers to purchase contracts with a duration of 12 months to 18 months with strike prices about 25 percent below the current market price, Jepsen said.

Gains on Commodities

The pension fund made a pretax return of 11.3 billion kroner on its 388 billion-krone markets portfolio in the first half, down from 15.2 billion kroner a year earlier, as earnings were helped by gains on commodities and the fund’s holdings of German and Danish government bonds.

ATP covers all wage earners in Denmark and is funded by contributions paid by employers and workers. It reworked swap agreements to exclude the use of bonds sold by France, Italy and other southern European governments as collateral against equity derivatives, interest-rate swaps and repurchase agreements, or repos, Chief Executive Officer Lars Rohde said last week.

“We’re in the middle of the third ‘100-year storm’ during my 12 years at ATP,” Jepsen said, referring to events considered to be rare such as the collapse of Lehman Brothers Holdings Inc. or the dot-com bubble. “A lot of things people never expected to happen actually happened.”

--Editors: Andrew Rummer, Srinivasan Sivabalan

To contact the reporter on this story: Peter Levring in Copenhagen at

To contact the editor responsible for this story: Andrew Rummer at

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