Danish Private Debt Burden Triggers Central Bank Warning

Denmark’s central bank is stepping up its focus on the country’s record private debt load to ensure households don’t suffer losses when interest rates start to rise, Governor Nils Bernstein said.

“People who are highly indebted are more vulnerable to interest rates and can be hit hard by changes,” Bernstein said in an interview in Copenhagen yesterday. The bank is now conducting a review of the risks, he said.

Households in the AAA rated nation increased their debt burdens to 310 percent of disposable incomes in 2010, the world’s highest ratio, according to Exane BNP Paribas. While the debt is backed by the world’s second-highest pension savings rate after the Netherlands, those assets are “locked shut,” Bernstein said. The central bank has argued that failure to address the risks may jeopardize the stability of Denmark’s $470 billion mortgage bond market.

“The goal is to analyze how vulnerable households are to changes in the interest rate,” Bernstein said. “There are certainly some who are vulnerable. What we want to know is how widespread it is and how vulnerable they are.”

Denmark’s central bank uses interest rates to maintain the krone’s peg to the euro. Bernstein lowered the benchmark lending rate to 0.7 percent in December after investors fleeing the euro region’s debt crisis turned to the Nordic country, threatening to strengthen the Danish currency.

Photographer: Ulrik Jantzen/Bloomberg

The headquarters of Denmark's central bank stand in Copenhagen. Close

The headquarters of Denmark's central bank stand in Copenhagen.

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Photographer: Ulrik Jantzen/Bloomberg

The headquarters of Denmark's central bank stand in Copenhagen.

Debt Crisis

Denmark’s government debt is about half the average for the euro region, and will reach 44.6 percent this year, compared with an average for the 17-member euro region of 90.4 percent, the European Commission estimates. The nation’s haven status from the debt crisis has spurred investment in its mortgage bonds.

An index of Denmark’s most traded mortgage bonds compiled by Copenhagen-based Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, touched a record on March 13, and has slipped 0.3 percent since.

Investor demand for Danish mortgage bonds is allowing households to build up more debt. Private debt rose to about 150 percent of gross domestic product in 2010, the central bank estimates. That ratio was less than 100 percent in 2000. Pension savings made up 142 percent of GDP in 2010, it said.

The economy is struggling to recover from the housing bubble that burst in 2007. House prices will have slumped 25 percent by next year since the crisis started, the government- backed Economic Council said in November.

Consumption Standstill

An index measuring consumer confidence remained below zero for a ninth consecutive month in March, Denmark’s statistics agency said today. The scale runs from 100 to minus 100.

“The level of consumer confidence is still so low that it only signals a standstill in consumption,” said Las Olsen, an economist at Danske Bank A/S (DANSKE) in Copenhagen, in a note to clients. “Real incomes are declining, unemployment has stagnated at a fairly high level and there is still considerable uncertainty in the housing market.”

House prices fell an annual 8 percent in the fourth quarter, the Association of Danish Mortgage Banks said March 20. Gross unemployment was 6 percent in January, versus 6.1 percent a month earlier, the statistics agency said March 1.

‘Disquieting Heights’

Gross household debt climbed to “disquieting heights” before Denmark’s property bubble burst in 2007, the Organization for Economic Cooperation and Development said in a January report.

Debt levels have swelled as lenders move away from traditional fixed-rate 30-year loans and offer cheaper mortgages to attract borrowers. In 1996, banks started selling adjustable- rate loans requiring mortgage holders to refinance their debt as often as annually. Parliament allowed interest-only loans in 2003, allowing borrowers to defer principal payments for 10 years.

Interest-only mortgage loans made up 56 percent of residential lending, the Association of Danish Mortgage Banks said in January. That compares with 54 percent a year earlier.

Bernstein has argued riskier home loans and a failure to link property taxes to home values may exacerbate economic imbalances.

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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