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Denmark Exhausts Stimulus Avenues as Housing Losses Persist

Denmark Exhausts Last Stimulus Avenues as Housing Losses Persist
Denmark’s $300 billion economy probably contracted last quarter, after shrinking 0.7 percent in the three months through December, according to Danske Bank A/S and Svenska Handelsbanken AB. Photographer: Freya Ingrid Morales/Bloomberg

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.

“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

Denmark’s $300 billion economy probably contracted last quarter, after shrinking 0.7 percent in the three months through December, according to Danske Bank A/S and Svenska Handelsbanken AB. That would mark the nation’s third recession in less than four years, singling Denmark out as the Scandinavian nation hardest hit by the global financial crisis.

The country has yet to surface from the fallout of a burst housing bubble that’s sent property prices plunging more than 20 percent since 2007. The average sales price for a single-family home fell 5.9 percent in January from a month earlier, the statistics office said April 5.

The government of Prime Minister Helle Thorning-Schmidt won lawmaker backing last week for a 75 billion-krone ($13 billion) package of support measures including corporate tax cuts and tax breaks on home refurbishment.

Too Small

The measures are too small to jolt Denmark out of its economic plight, according to Danske Bank, the nation’s largest lender. The government has argued that dedicating more public funds to stimulus would jeopardize its stable AAA rating.

The euro area will contract 0.3 percent this year after shrinking 0.6 percent in 2012, the European Commission said in February. Of the 17 nations that make up the bloc, only Finland still boasts a stable AAA credit grade at the three major ratings companies.

The Economy Ministry said yesterday gross domestic product will grow 0.7 percent this year, an estimate that paints “a far-too rosy picture of Denmark’s economic prospects,” according to Jes Asmussen, chief economist at Handelsbanken in Copenhagen.

Denmark’s central bank uses monetary policy to defend the krone’s peg to the euro. A public debt load that’s less than half the euro zone’s average has helped Denmark maintain its top rating throughout the crisis, spurring a capital influx and forcing the central bank to cut rates to defend the currency peg. The benchmark lending rate is 0.3 percent while the deposit rate is minus 0.1 percent.

Debt Costs

Denmark pays 14 basis points more than Germany to borrow over 10 years. Its 1.5 percent bond due November 2023 yielded 1.355 percent as of 12:18 p.m. in Copenhagen, lower than any euro member except Germany. Five-year credit-default swaps on Danish government debt rose to 33 basis points today, their highest in a week based on closing prices, from 31 basis points yesterday, according to data compiled by Bloomberg.

“With the uncertainties that persist in Europe it would be unwise to spend more as things can still change for the worse,” Vestager said.

Her ministry estimates the budget deficit will reach 1.7 percent of GDP this year and 1.8 percent in 2014. The figures include an estimated 40 billion kroner in proceeds from capital pension taxes. Excluding that windfall, Denmark may approach the European Union’s 3 percent limit, Vestager said.

Handelsbanken yesterday cut its forecast for the Danish economy to a 0.1 percent contraction in 2013 from a previous 0.3 percent growth forecast. That will also reduce government income and means “the official budget forecast is much too optimistic,” Asmussen said.

No Improvement

While low interest rates have helped keep most Danes in their homes even after property values plunged, the lingering effects of the nation’s housing crisis continue to blunt demand, according to Danske Bank.

“It’s weighing significantly on private consumption,” Steen Bocian, chief economist at Danske, said in a telephone interview. “The property market won’t improve enough to have a positive impact on private consumption in the economy this year.”

Thorning-Schmidt’s three-party coalition has pledged to restore economic growth to 2 percent on average from 2014 through 2020. Vestager said growth will accelerate in the second half of this year, allowing the government to reach its long-term target.

“We have government debt under control and are using our fiscal leeway to support employment,” Vestager said. Measures taken are designed to “sustain confidence in Denmark’s economy,” she said.

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