Wednesday 4 July 2012

DANISH INTEREST RATES (2)

Interest is the price paid in order to borrow money. And in the same way as prices don't dip below zero - there's no such thing as a free lunch - nominal interest rates don't fall below zero either. Real ones, namely those adjusted for inflation, can and do; but nominal ones don't. After all, that would be paying somebody to keep your money for you.

That at least is the theory. The practice, however, is rather different. Twice in the past couple of weeks, the Danish central bank has sold bonds with a negative interest rate of 0.05%. Furthermore, these bonds are not 3-month or 6-month paper, but 2-year and 10-year bonds.

What is happening? It can't be Danish investors that are purchasing these bonds; even at low interest rates, they would get a better return by putting their money in the bank. No, the buyers are foreigners, who are essentially betting that the Danish krone will rise against their currency (mainly euros) during the next 2 or 10 years. So what they lose on the interest will be more than offset by a gain on the exchange rate.

Or, to be more precise, they are betting that the euro will fall against the krone. Investors think that the euro crisis will continue for some time to come and are voting with their feet. Things must be bad if Denmark's currency has become a safe haven.

Walter Blotscher
Posted by Walter Blotscher at 15:55

1 comment:

  1. Anonymous10 July 2012 at 01:44

    Danish economy is quite strong, at the end of 2011 was the emu debt approximately as far as I remember 43% of GDP, state debt was 23% of GDP and net debt was 3,5%
    Basically, state debt and net debt are so low numbers since the danish state and public companies and public founds are having a huge amount of cash and assets

    Germany in comparison was at a EMU debt of 83% and net debt of 55% of GDP

    It makes sense to use Denmark as a safe haven currency since the danish crown is pegged to the Euro in a narrow band there has a history of being defended and since Denmark are having large currency account surpluses and large reserves are there also trust in the ability to repay the money

    Combine that with a large amount of brave structural reforms being implemented and a state budget deficit under control. It is believed to be down to 1,7% next year and the geographical area, that is Denmark border Germany and Sweden, that is, 2 countries also known to have strong economies and that will help to keep the danish economy above water in case of problems in other parts of Europe.

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