Bloomberg News

Denmark Loses Borrowing Advantage Over Germany: Copenhagen Mover

January 31, 2012

Jan. 30 (Bloomberg) -- The advantage on 10-year borrowing that Denmark’s government has enjoyed relative to Germany since November has evaporated as yields on bonds from the largest euro member decline.

The Danish government 10-year yield converged with borrowing costs on similar-maturity German bunds as of 11:48 a.m. in Copenhagen. The spread had been negative, meaning Denmark has paid less than Germany to borrow, since Nov. 23, peaking at 27 basis points on Dec. 1. The spread was negative in January 2011 for four days, for the first time since 2007.

European leaders meet in Brussels today to complete a deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund set to start this year. The European Central Bank last month offered banks unlimited three-year loans, easing concern over the debt crisis and sapping a capital flight to non-euro countries such as Denmark.

“We have a lot of plumbing in place now, including the ECB long tenders and an underlying economy that looks less bad than thought in Europe,” said Thomas Groenkjaer, chief analyst at Danske Markets in Copenhagen, by phone today.

Waning demand for Danish bonds may ease pressure on the central bank, which has cut interest rates and sold kroner to defend its peg to the euro. The bank reduced rates to a record- low of 0.7 percent last month. On Jan. 3, the central bank said it purchased a net 17.8 billion kroner ($3.06 billion) in foreign currency, the biggest monthly amount since May 2010.

Nordic Moves

The Nordic country had seen an influx of capital as investors rewarded governments with low debt burdens. Denmark’s public debt load will reach 44.6 percent of the economy this year, compared with an average of 90.4 percent in the 17-member euro region, the European Commission estimated on Nov. 10.

Similar spread moves have also occurred in Norway and Sweden this year, which are also outside the common currency. Norway’s 10-year note today yields 55 basis points more than German debt, after that difference narrowed to as little as 5 basis points on Jan. 16. Sweden’s 10-year note yields 8 basis points less than the German equivalent, down from an advantage of 64 basis points at the end of November.

Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signalled they would accept European government demands for a bigger cut in their debt holdings.

Denmark’s twin housing and banking crises combined with limited liquidity in its government debt market are showing signs of giving investors pause as the Nordic country teeters on the brink of recession. Denmark’s economic growth rate will slump to 0.6 percent this year from 1 percent in 2011 as the country loses competitiveness, the Organization for Economic Cooperation and Development said Jan. 26.

Exports Depressed

“The renewed global slowdown will depress exports and delay the hoped-for pick-up in investment and private consumption,” the OECD said in the 26 report. “Competitiveness has deteriorated markedly since 2000 and the recent improvements were not sufficient to fully reverse previous losses.”

At the same time, German business confidence is showing signs of improving, signaling the economy is weathering the worst of Europe’s debt woes. Germany’s 10-year government bonds rose today for a fourth day as European Union leaders prepared to gather for their latest summit to rescue the region from its fiscal crisis.

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

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


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