Denmark Says Cutting Debt Top Priority Amid Recession Bets

Denmark Says Debt Reduction Is Top Priority
Cyclists ride bikes past the headquarters of Denmark's central bank in Copenhagen. Photographer: Linus Hook/Bloomberg

Denmark’s government will make debt reduction a top priority even as the central bank predicts the economy will contract this year and the International Monetary Fund urges policy makers to consider direct stimulus.

Denmark’s burst housing bubble has left the economy in a “depressed state,” according to a Dec. 6 note by Goldman Sachs Group Inc. Danske Bank A/S, Denmark’s biggest lender, estimates gross domestic product will shrink 0.5 percent this year, after a 25 percent slump in house prices since 2007 left consumers poorer. Yet the government, which is due to publish revised economic forecasts on Dec. 13, will go ahead with budget cuts, Economy Minister Margrethe Vestager said.

“The alternative is to push a debt mountain ahead of us to be paid by us and later generations,” Vestager said in a telephone interview yesterday.

Denmark’s economy barely grew last quarter, while a contraction in the three months through June was deeper than previously estimated, the statistics office said last week. Five bank rescue packages since 2008 may not be enough to prevent the nation’s housing slump from deepening, Thomas Dorsey, the IMF’s mission chief to Denmark, said last month.

The government’s commitment to reducing its deficit, which the European Commission estimates will narrow to 2 percent of GDP next year from 3.9 percent in 2012, may be at odds with a growing body of research suggesting austerity measures that choke growth also end up depleting public finances. Nobel laureate Paul Krugman has urged Europe to focus on growth instead of debt to make debt-to-GDP ratios more sustainable.

Contracting Europe

The euro-zone economy will contract 0.4 percent on average this year and grow just 0.1 percent in 2013, the European Commission said on Nov. 7. Eight of the 17 nations that make up the bloc will see their economies contract in 2012, while average euro-zone debt will swell to 94.5 percent of GDP next year from 92.9 percent, the commission estimates. The bloc sets a 60 percent debt-to-GDP limit, and a 3 percent deficit cap.

“We may help to improve the EU economy as such, but we’re primarily doing ourselves a favor” by cutting the deficit, Vestager said.

Danish Finance Minister Bjarne Corydon said last week Denmark’s economy is in a “crisis” and acknowledged that the recovery the government had hoped was underway is “proving slow” to arrive. Central bank Governor Nils Bernstein, who unveils his own forecasts this week, said on Dec. 3 Denmark’s economy will shrink this year, cutting an earlier forecast for growth.

Record Cuts

Denmark’s employers announced plans to fire 2,237 people last month, 225 percent more than a year earlier, as a lack of economic growth leaves its mark on the labor market, Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said in note to clients. The number of job cuts in November was the highest since 2009, according to Asmussen.

Vestager’s latest estimates, published in August, foresee 0.9 percent GDP growth this year. Fitch Ratings a month later called the estimate “optimistic.”

Still, Denmark’s bond yields suggest investors are undeterred by the nation’s dimming economic prospects. Its benchmark 10-year note yields about 29 basis points less than similar maturity German bunds, while the yield on Denmark’s two-year note was minus 0.189 percent as of 10:46 a.m. local time.

Default Risk

It’s also cheaper to insure against the risk of a default on Danish debt than on German bonds, using credit derivatives. Five-year default swaps on Danish government debt traded at 31 basis points today, versus about 34 basis points for German contracts, according to data available on Bloomberg.

The central bank in Copenhagen has left its deposit rate at minus 0.2 percent since July to counter a capital influx as policy makers defend the krone’s peg to the euro.

Though Denmark’s public debt is less than half the euro-zone average, private debt reached 322 percent of disposable incomes in 2010, according to Standard & Poor’s. That’s the highest ratio in the world. Low borrowing costs have helped keep that debt load sustainable.

“One of the paradoxes we need to relate to in this modern world is that while our independence is very dear to us, it’s worth very little unless we use it to act together with others,” Vestager said.

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