Nationalbanken Defends Sub-Zero Bemoaned by Banks: Nordic Credit

Denmark’s banks have been given the support measures they need, central bank Deputy Governor Per Callesen said, as policy makers defend negative interest rates that the country’s banks say are undermining profits.

“We’re satisfied with the way in which our current policy mix is working,” Callesen said in an Oct. 31 telephone interview out of Copenhagen. “We’ve in many ways extended our facilities to support a stable financial system. These measures have worked well and had the intended result. We think we’ve done what’s needed.”

The central bank has kept its deposit rate at minus 0.2 percent since July, in an effort to fight off a capital influx and maintain the krone’s peg to the euro. The bank has signaled it won’t be swayed by financial industry complaints about the costs incurred by negative rates, arguing instead that the policy rate tool is there only to protect the krone.

Banks had about 150 billion kroner ($26 billion) in the central bank’s deposit facility last week, costing them some 300 million kroner annually, the Danish Bankers Association estimates. At the same time, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.

Support Measures

The central bank has taken a number of measures to support banks, expanding its collateral base to accept a broader palette of securities, and extending loan maturities available at the benchmark lending rate -- 0.2 percent since July -- to six months and three years. Since July, the bank has twice raised the ceiling on its current account facility, which carries a rate of zero.

“The bank is making it absolutely clear that their only consideration is the exchange rate,” Jacob Graven, chief economist at Sydbank A/S, said by phone.

While some banks in the U.S., Canada and Sweden have started charging clients for their krone-denominated deposits, lenders in Denmark have hesitated for fear of losing business. The government, which has passed five bank rescue packages since 2008, has also warned any decision by the financial industry to charge for deposits would repel customers and hurt lenders.

Banks in Denmark are struggling to surface from a burst housing bubble that’s claimed at least a dozen lenders since 2008. The nation is probably in the grip of its second recession in less than a year, the Confederation of Danish Industry estimates. House prices, which have slumped 25 percent since their 2007 peak, will continue to fall until 2014 as unemployment rises, the government-backed Economic Council said yesterday.

Stimulus Effect

Against that backdrop, historically low interest rates are supporting consumer demand for credit and will help buoy an economic recovery, according to the council.

“The central bank’s policy regime, keeping the deposit rate below zero and lending rates almost as low, is motivating lenders to lend money,” Joergen Whitta-Jacobsen, chairman of the council, said in an interview. “It is helping the economy, while it’s difficult to quantify how much, first through short- term lending and subsequently on longer maturities.”

The central bank will only move out of negative rates should the exchange rate warrant it, Callesen said. Policy makers won’t be swayed by financial industry complaints to depart from their goal of defending the krone peg, he said.

‘Proven Effective’

The Danish central bank targets a krone rate of 7.46038 per euro. Denmark’s status as a haven from Europe’s debt crisis -- thanks to a government debt load that’s less than half the euro- zone average and a current account surplus -- has attracted investors fleeing crisis-tainted euro-zone assets.

The yield on Denmark’s benchmark 10-year note was at 1.23 percent yesterday, about 23 basis points less than similar- maturity German bunds, according to data available on Bloomberg. Denmark’s 2 percent note due November 2014 yielded minus 0.06 percent yesterday, as investors pay the government for the privilege of holding its two-year debt.

The krone traded at 7.4599 against the euro yesterday, from 7.4593 a day earlier. Foreign currency reserves, which swelled to a record high of 514.4 billion kroner in August, were at 513.5 billion kroner in September, according to the central bank.

The bank’s negative policy rate has been effective in reducing demand for the krone, Graven at Sydbank said. That means the central bank may have the freedom to raise both its deposit and lending rates by 0.1 of a percentage point this month, he said. The “joker” remains the development in Europe’s debt crisis, where a deterioration would require the central bank in Denmark to leave rates low, Graven said.

“Traditionally, it’s proven effective to first shift the currency reserves by interventions and then change the interest rate,” Callesen said.

To contact the reporters on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net; Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.ne

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