Bloomberg News

Danish Krone Appetite Has Central Bank Testing Record Low Rates

December 12, 2011

Dec. 9 (Bloomberg) -- Demand for Denmark’s krone is testing the central bank’s toolkit as it sends interest rates to record lows and adds liquidity in an effort to counter a capital influx that’s intensified as the euro area’s crisis deepens.

Nationalbanken yesterday cut its lending rate to 0.8 percent from 1.2 percent to maintain the krone’s peg to the euro, after the European Central Bank lowered its main rate a quarter of a percentage point to 1 percent. The Copenhagen-based bank will also offer banks and mortgage lenders three-year loans and conduct regular operations to adjust liquidity to support the currency peg, it said.

“Investors are spreading their risk on more currencies amid the euro crisis,” Anders H. Svennesen, portfolio manager at Hilleroed, Denmark-based ATP, with $130 billion in assets, said in an interview. “That’s benefiting Danish assets, along with for example Swedish, Norwegian and Swiss.”

ECB officials, meeting under the presidency of Mario Draghi for a second time, have signaled they may step up efforts to end the euro area’s debt crisis 19 months after Greece became the bloc’s first nation to seek a bailout. Denmark’s main rate has been below the ECB’s since the two banks last cut borrowing costs on Nov. 3.

“There seems to be interest from both foreign and domestic investors for Danish government bonds,” Svennesen said. His fund held Danish government debt worth 197 billion kroner ($35.3 billion) at the end of 2010 and has kept the size of the investment almost unchanged this year, he said.

Zero Rates

Denmark’s central bank, whose sole mandate is to keep the krone within a 2.25 percent band against the euro, doesn’t hold scheduled meetings and can change its rates at any time to defend the peg.

The krone traded at 7.4353 against the euro yesterday in Copenhagen. That compares with a six-month average of 7.4482, according to Bloomberg data. The central bank seeks to defend a central target of 7.46038 against Europe’s single currency and in practice only tolerates swings well within the 2.25 percent band.

The ECB is likely to cut its main rate again in January, bringing its benchmark to 0.75 percent and forcing the Danish lending rate down to 0.55 percent “or even lower,” said Arne Lohmann Rasmussen, chief analyst at Danske Bank A/S, in a note.

“We’re fast approaching de facto zero rates in Denmark,” Lohmann Rasmussen said. “This is driven by the large inflow into Danish government bonds in recent months.”

Foreign Interest

Foreign investors raised their share of Danish bonds to 34 percent of the total in October from 27 percent at the beginning of the year, Lohmann Rasmussen said.

“We expect the purchases to continue through December,” he said.

It costs Denmark about five basis points less than Germany to borrow for 10 years. The Nordic country pays about 25 basis points less than Germany to borrow for 30 years.

Denmark’s $325 billion economy is Scandinavia’s worst performing as the nation grapples with a banking crisis and housing slump. Most of the country’s banks have been cut off from funding markets, squeezing credit and stalling growth.

Still, investors are rewarding the Nordic nation’s limited debt burden. Denmark’s government debt will be 44.1 percent of gross domestic product this year, compared with a euro-area average of 88 percent, the European Commission said Nov. 10.

Haven Status

Denmark’s burden is relatively small because “a lot of debt was paid off in the good years before the crisis,” Svennesen said.

Denmark used a net 10.7 billion kroner ($1.93 billion) of foreign currency last month to protect the krone’s peg against the euro through so-called interventions, the central bank said Dec. 2. Denmark had foreign reserves of 467.7 billion kroner at the end of November, compared with a five-year average of 287.2 billion kroner, according to Bloomberg data.

“The big interest in Danish securities underlines that the country is perceived as a safe haven in the current crisis,” Lohmann Rasmussen said.

--Editors: Tasneem Brogger, Kati Pohjanpalo.

To contact the reporter on this story: Christian Wienberg at cwienberg@bloomberg.net

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


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