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Denmark’s Bond Prices Hide Recession Risk Amid Housing Slump

Danish government bond prices may belie a growing risk of recession, as investors fleeing the euro area’s debt crisis ignore the Scandinavian nation’s housing slump.

The bond markets are “out of whack due to what’s happening in southern Europe and the debt crisis,” Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said in an interview. Denmark “has been in a recession already and I think we’re going to be there again. It seems pretty clear that the outlook is quite dire.”

The difference in yield on Danish 10-year bonds and similar-maturity German bunds eased to a nine-day low of 20 basis points yesterday, as Europe’s debt woes spread to Italy, prompting investors to seek shelter in regions like Scandinavia. While Denmark’s government debt is half the euro-area average at 44 percent of the economy, investors shouldn’t ignore the risks posed by the prospect of a 10 percent decline in house prices next year combined with rising joblessness, Asmussen said.

“The internal demand picture is very weak and disturbing,” he said. “The housing market seems to be completely frozen,” in part due to a “credit crunch, but more so unemployment and the economic development in the long term,” he said.

Property Slump

By the end of next year, property prices will have slumped 25 percent from their peak just before the crisis started in 2007, the government-backed Economic Council said last week. That’s adding to the risk of a recession as unemployment jumps about 16 percent in the next two years, the council said.

A drop in lending is forcing Copenhagen-based Nykredit A/S, Europe’s largest issuer of mortgage-backed covered bonds, to consider firing employees as it searches for ways to cut costs.

“Our income has gone down by around 5 percent and our costs have increased by around 5 percent,” Nykredit Chief Executive Officer Peter Engberg Jensen said by phone yesterday. “We will do whatever we can not to fire people, but I cannot guarantee it.”

Denmark’s $325 billion economy shrank 0.5 percent in the third quarter and will contract a further 0.1 percent in the fourth, Danske Bank A/S, the country’s biggest lender, said this week. Output grew 1 percent in the second quarter after falling in the first and fourth quarters, the statistics office estimates.

‘On the Brink’

“The Danish economy is teetering on the brink of a recession, and this time there are grounds to be more worried than was the case at the end of last year,” Danske Chief Economist Steen Bocian said. “The Danish economy is in a fragile state, which could already be a manifestation of an actual recession.”

Denmark’s two-year spread versus German bunds widened 2.5 basis points to 20.5 basis points while the 10-year spread narrowed 2 basis points to 17.5.

Denmark’s budget deficit will be wider than the euro-area average next year, at 4.5 percent of gross domestic product, the European Commission said yesterday. The governments of neighboring Sweden and Norway will both post surpluses, while Finland’s deficit will narrow to 0.7 percent of GDP in 2012, the commission estimates.

“The public deficit is going to be much higher already next year,” Asmussen said. “We still have a debt issue in Denmark, looking into 2013 and 2014.”

Bank Crisis

That means the government will need to tighten policy to prevent debt growing, which will in turn quell any signs of recovery, Asmussen said. Meanwhile, Denmark is struggling to emerge from a local banking crisis that has seen three failures this year, triggered senior creditor losses and left most of the country’s roughly 120 banks shut out of international funding markets.

Standard & Poor’s raised its risk assessment of Denmark’s banks and economy this week to an overall grade of three from two, putting Denmark on the same level as Italy.

Denmark is Scandinavia’s worst-performing economy. GDP will grow 1.2 percent this year, compared with 1.5 percent in the euro area, the commission estimates. The economy of Sweden will expand 4 percent in 2011 while Finland will grow 3.1 percent.

According to the Confederation of Danish Industry, which represents 10,000 companies including the world’s largest turbine maker Vestas Wind Systems A/S and brewer Carlsberg A/S, exports are suffering a bigger blow than can be explained by Europe’s debt crisis alone.

Can’t Explain

“Exports have gone down rather sharply in the third quarter,” and “we cannot explain why,” Klaus Rasmussen, chief economist at the Copenhagen-based industry group, said in an interview. “The outlook for the fourth quarter is not good.”

Exports fell 1.2 percent in the three months ending Sept. 31 and were down 1.8 percent from August, the statistics agency said Nov. 9.

Meanwhile, investors are still pouring funds into Denmark. A capital influx helped raise Denmark’s current account surplus to 12 billion kroner in September, the highest level in a year. The central bank last week cut the benchmark rate, bringing it below the European Central Bank’s rate for the first time, as it tries to weaken the krone and maintain Denmark’s currency peg to the euro.

For now, “international investors still see Denmark as a safe haven,” he said. “We are crossing our fingers.”

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