Danes risk loading up on debt they can’t afford amid record-low rates as an eventual rise in borrowing costs could be hard to handle for some consumers, central bank Governor Nils Bernstein said.
There could be a “concern” that “people have become accustomed to the low rates and have made their budgets according to the low rates,” Bernstein said this week at his Copenhagen office in his last scheduled interview before he retires this month. “One could expect that some will come into trouble as rates begin to rise.”
Danish private sector debt, Europe’s highest relative to the size of its economy, threatens an economic recovery in the Nordic country by curbing private consumption, according to the European Commission. The government last month cut its forecast for growth in consumer spending this year even as the nation struggles to emerge from a four-year housing slump.
While a study by the central bank, called Nationalbanken, concluded in December that household debt is not now a threat to financial stability, the preponderance of interest-only mortgage loans remains a risk, Bernstein said.
“It’s something that one needs to have an eye on,” the 70-year-old central banker said. “That the system isn’t going to collapse isn’t to say that it’s problem-free, because there will be some who may come into trouble but not enough to threaten financial stability.”
Denmark’s mortgage lenders are now in talks with regulators over how to keep struggling borrowers afloat as principal comes due on the first interest-only loans that were issued a decade ago. The industry’s loan writedowns jumped 51 percent in the six months through June 30, the Financial Supervisory Authority said last month.
Bernstein’s policies have helped fuel borrowing as he has cut rates to unprecedented levels to protect the krone’s peg to the euro. The bank last year lowered its key monetary rate to a negative, while mortgage rates fell below 0.5 percent, as investors fleeing from Europe’s sovereign debt crisis bought up the country’s AAA rated government and mortgage bonds.
Low rates have fueled demand for interest-only and adjustable-rate mortgage loans, which now make up more than half of outstanding home loans.
“We still have the whole discussion about the very large amount of interest-only loans, which in our view amplify negative trends in the economy,” Bernstein said.
The ratio of Denmark’s gross private sector debt to gross domestic product was at 243 percent in 2010, the highest among EU-members states, the commission said in a May report. The economy is “considerably behind” peers including Finland in returning to its pre-financial crisis level, the commission said.
Consumer spending will grow by 1.5 percent in 2013 amid a slump in the housing market, the government said last month, cutting an August forecast of 2.3 percent. The International Monetary Fund has urged the government of Prime Minister Helle Thorning-Schmidt to stand ready to support the economy if it continues to weaken.
Gross domestic product contracted 0.4 percent last year and will grow by 1.2 percent this year amid “moderate” private consumption, the government estimates.
The central bank in July cut its deposit rate to minus 0.2 percent, while its lending rate stands at 0.2 percent. The bank’s mandate is to keep the krone fixed to the euro, which means it typically follows rate changes made by the European Central Bank.
“Recently there’s been a tendency toward net outflows, which points toward an independent Danish hike, but the outflow has been very limited,” Lars Olsen, senior economist at Danske Bank A/S (DANSKE), said today in an e-mail.
“We do expect independent Danish hikes,” he said. “The main scenario is two hikes of 10 basis points before the summer.”
Bernstein declined to say when the bank will change its rates, citing internal policy.
“But that said, there isn’t any doubt that interest rates in general are unusually low at this point,” he said. “So it shouldn’t be any surprise to guess that at some point it will increase.”
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org