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Thorning-Schmidt Says Danish Rebound to End Era of Deficits

Danish Prime Minister Helle Thorning-Schmidt
Helle Thorning-Schmidt, Denmark’s prime minister. Photographer: Ulrik Jantzen/Bloomberg

Denmark’s Prime Minister Helle Thorning-Schmidt said the government will get rid of its budget deficit in the “medium term” as economic growth picks up in the Nordic country.

“We are hoping that next year will have more growth,” Thorning-Schmidt said in a texted reply to questions in Reykjavik late yesterday, after meeting with her Icelandic counterpart Johanna Sigurdardottir. “That will improve the economy and help us achieve the goal of a balanced budget in the medium term.”

Thorning-Schmidt’s Social Democrat-led coalition said this week it will cut its domestic borrowing need by 29 percent in 2013 as the budget deficit is reduced by more than half to 1.9 percent of gross domestic product and economic growth almost doubles to 1.7 percent. The improved outlook means Denmark will probably cut its bond issuance next year, according to Danske Bank A/S, the country’s biggest lender.

Yet even the projected fiscal consolidation may understate the potential to reduce the deficit, the government signaled yesterday. An estimated 5 billion kroner ($840 million) in revenue from an overhaul of capital pension taxes may end up “considerably higher” than budgeted, meaning the outlook for public finances is “much less certain than usual,” the Finance Ministry said. Denmark last posted a budget surplus in 2008, according to the European Commission.

Debt Reduction

“Ours is a low but safe estimate,” Finance Minister Bjarne Corydon told reporters in Copenhagen yesterday. “Others have estimates that are much higher and it’s clear that if those estimates turn out to be true, we’ll use the money to reduce our debt.”

The country’s debt office has so far signaled it won’t revise its outlook for issuance. Ove Sten Jensen, head of debt management at the central bank said his department is sticking to this year’s estimated 100 billion kroner in bond sales. The office has yet to arrive at an estimate for next year’s issuance, he said in an interview yesterday.

Reduced Danish debt issuance would coincide with the growing haven appeal of the nation’s bond markets. Denmark, which pegs the krone to the euro, pays less than Germany to borrow and has charged investors to hold its two-year debt through most of July and August.

‘Big Impression’

The yield on Denmark’s benchmark 10-year note eased one basis point to 1.088 percent as of 11:12 a.m. local time, 27.3 basis points lower than the yield on similar-maturity German bunds. That’s the most negative spread since Dec. 1, when it reached a record low of minus 27.5 basis points. The government will target policies that ensure Danish rates stay low, Economy Minister Margrethe Vestager said.

“It makes a big difference how expensive it is to borrow, and it affects employment,” Vestager said in an interview in Copenhagen yesterday. “It makes a big impression on me, that the low interest rates since 2008 have kept 40,000 people employed.”

Denmark’s public debt will be less than 30 percent of gross domestic product this year and next. The government’s commitment to debt reduction has boosted its haven status as much of the euro area struggles to emerge from a fiscal crisis, Thorning-Schmidt said.

“There’s no doubt that the economic policies that we’ve had in Denmark have made Denmark a safe-haven,” she said. “It’s also connected to the insecurities” associated with investing “in other countries,” she said.

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