Sept. 30 (Bloomberg) -- Danish Central Bank Governor Nils Bernstein said Denmark would have been hurt less by the financial crisis had it adopted the euro, calling the common European currency an “insurance policy” for the economy.

“The crisis has shown us this is not just a political problem,” Bernstein, 66, said in an interview in Copenhagen on Sept. 28. “The crisis has shown that we can manage economically outside the euro, but it has also demonstrated that there are big advantages during a crisis to be inside and much more protected against turmoil and to have access to the euro system’s facilities.”

Denmark pegged the krone to the euro in 1999, obliging the central bank to use policy to steer the currency. Nationalbanken raised the benchmark rate to 5.5 percent in October as policy makers defended the krone from a sell-off while the European Central Bank cut its main rate. That led to higher mortgage payments for Danish holders of adjustable-rate loans and increased the euro’s appeal among voters.

“The big interest rate differential we had last year wouldn’t have been necessary had we been inside the euro zone,” Bernstein said. “We were under pressure.”

Denmark would have had earlier access to dollars had it been a member of the common European currency, he said. In September last year, Nationalbanken was one of several central banks outside the euro zone to receive swap lines with the U.S. Federal Reserve.

‘Safe Harbor’

“We had to make an agreement with the Fed and a euro agreement with the ECB to help us through our problems, which demonstrates that in a storm it’s better to be in a safe harbor than alone at sea,” Bernstein said.

Momentum in favor of switching to the common currency has ebbed as the crisis abated and the Danish central bank cut its lending rate to a record low of 1.25 percent on Sept. 24. After rising to a three-year high of 53.4 percent in November, Danish voter support for the euro fell to 48.9 percent of respondents, a poll commissioned by Danske Bank A/S showed this month.

The government will probably break its pledge to hold a referendum on joining the euro this electoral term, which ends in 2011, as polls show dwindling support, government officials, who spoke on condition of anonymity because an official announcement has yet to be made, said this month.

Economists have said if Danes rejected the euro for a third time, after votes in 1992 and 2000, the issue could be sidelined for at least 15 years.

‘Not Very Convincing’

“My expectations are that there won’t be a referendum until we are sure to get a ‘yes’,” Bernstein said. “But the polls fluctuate a lot and are not very convincing. We’ve lost before, and you can’t try too often. It’s the government’s job to convince the voters.”

Former Prime Minister Anders Fogh Rasmussen, who has said not having the euro “damages” Danish interests, handed the premiership to Lars Loekke Rasmussen in April. The former promised a vote by 2011; his successor has gone on the record to say setting a deadline is “impossible,” though he’s stopped short of officially canceling Fogh Rasmussen’s pledge.

Danish support for the euro may recede further as the central bank continues to cut rates. Bernstein signaled the bank may take more steps to ensure market interest rates better reflect the fixed exchange-rate policy, adding the difference between market spreads and benchmark interest rate spreads was something the bank is “tracking continuously, attentively.”

‘No Target’

In an effort to reduce the difference between European and Danish interbank offered rates, the central bank has widened the spread between its own lending and deposit rates, reducing the return banks can get if they use central bank facilities.

“While there is no target for the spread between the lending and deposit rates, we can see signs that the difference between the two is starting to work according to plan,” Bernstein said. “The result is that financial institutions are making less use of the central bank’s facilities.”

The bank on Sept. 28 lowered the rate it pays on certificates of deposit to 1 percent from 1.15 percent, widening the spread between its lending and deposit rates to 25 basis points.

The difference between the three-month European interbank offered rate and the equivalent Danish rate dropped to 0.874 points today. That compares with 1.0943 points on June 30 and 2.036 points on Jan. 2.

More Cuts

“It’s quite likely that we’ll see more rate cuts, both with the lending rate and also the deposit rate,” Jacob Graven, chief economist at Sydbank A/S, Denmark’s third-biggest bank, said today. The bank probably hasn’t finished cutting rates, he said. He expects the spread to the ECB key rate to end at around 0.10 to 0.15 point. “There’s still a pretty hefty spread in market rates and that’s making the krone very attractive.”

The difference between the bank’s lending and deposit rates may widen to as much as 50 basis points, Graven said. “But this is untested terrain, so it’s hard to estimate.”

Lower rates may support the property market, after house prices dropped for the last six quarters, to slump a record 11.4 percent in the three months through June. According to Bernstein, prices probably won’t rise next year.

“Maybe in the third or fourth quarter the housing market will trough,” Bernstein said in an interview in Copenhagen on Sept. 28. “It will be flat in 2010, we don’t have big expectations that it will suddenly start to rise.”

To contact the reporter on this story: Gelu Sulugiuc in Copenhagen at gsulugiuc@bloomberg.net

Last Updated: September 30, 2009 06:42 EDT