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Denmark Feeds World’s Biggest Home Debt Load as Caps Spurned

Traditional Architecture Stands in Copenhagen
Denmark is the Scandinavian nation that’s fared worst during the global financial crisis. A housing boom that peaked in 2007 turned into a bust a year later, sending property prices down 20 percent. Photographer: Freya Ingrid Morales/Bloomberg

Denmark’s government has no plans to curtail private lending and is instead working on measures to help the world’s most indebted households maintain access to cheap credit.

While authorities in neighboring Norway and Sweden are probing ways to limit borrowing, Denmark says indebtedness is no threat because households can tap pensions and home equity if they get into trouble. Danes owe their creditors 310 percent of disposable incomes, the Organization for Economic Cooperation and Development estimates. That’s almost double the level in Sweden, where the central bank has suggested imposing a 200 percent cap on debt to safeguard financial stability.

“The impact of the debt depends on the nature of it,” Business Minister Henrik Sass Larsen said in an interview in Copenhagen. “The math showing Danes have record debt loads depends on what assets are actually included.”

There are few incentives for Danish households to deleverage as the government finds ways to ensure borrowers can continue using popular one-year bonds to finance mortgages as long as 30 years. That’s helped Danes tap into record-low interest rates, anchored by AAA-rated Denmark’s status as a haven from Europe’s debt crisis last year.

Dangerous Policy

Ignoring private debt growth, even if it’s offset by assets, may be a dangerous policy, according to Andreas Hakansson, a Stockholm-based banking analyst at Exane BNP Paribas. He argues pension savings and home equity may be hard to access in times of market stress, when they’re needed most.

“No matter how much you tweak the system, the underlying problem of too much debt is still there and nothing is being done to address that,” Hakansson said in a telephone interview. “It’s strange that central banks in Sweden and Norway consider this such a huge problem, when we have half the level of household indebtedness compared to Denmark.”

According to Larsen, Denmark isn’t at risk even though “housing debts are the biggest burden.” That’s because the government “has introduced ultra-healthy credit assessments,” he said.

Fared Worst

Denmark is the Scandinavian nation that’s fared worst during the global financial crisis. A housing boom that peaked in 2007 turned into a bust a year later, sending property prices down 20 percent. That triggered a spate of failures among community banks and 62 local lenders have been wiped out since 2008. The economy contracted 0.1 percent in the first six months after shrinking 0.4 percent in 2012, official data show. House prices dropped 0.1 percent in October from September, Danske Bank A/S said today, citing its realtor chain, Home.

The European Commission warned yesterday that Denmark “is experiencing macroeconomic imbalances involving the high level of household debt and the continuing adjustment in the housing market.” The risks are partly mitigated by a concentration of debt in “high-income households,” which are less vulnerable to “interest rate shocks,” according to the commission.

Though Denmark’s mortgage bond market withstood losses that ripped through the local bank community, ratings companies and the central bank have urged the industry to wean homeowners off short-term financing, which is seen as a risk to financial stability in the $340 billion economy.

New Proposals

Larsen last week proposed plans to address refinancing risks in short-term bonds that had threatened to disrupt the housing market and put the country’s $530 billion mortgage market on a collision course with European stable funding rules. The measures will ensure borrowers continue to get access to one-year financing, which will only convert to longer maturities if interest rates rise 5 percentage points or if an auction fails.

At the end of June, Danish households owed 2.73 trillion kroner ($490 billion), while pension savings were 2.49 trillion kroner, according to central bank data.

The International Monetary Fund said in September households in Denmark had negative assets, when disregarding pensions and property values. The Washington-based fund has warned that Denmark’s high level of indebtedness is a risk.

The Danish Systemic Risk Council, created this year to guard against financial instability, says it’s responding to international warnings by investigating whether new constraints should be imposed on banks.

Still, while Norway and Sweden are taking steps to continue tightening their bank requirements, in part to cool overheated housing markets, legislators in Denmark have signaled they’ve done what’s needed. Larsen said last month he’s unlikely to propose further measures unless the EU requires more. He also says Danes now are much better off than previous generations.

“In the past, people would only have 25 percent of their previous income when retiring,” Larsen said. “Then large debts would be a problem for those retiring, but that’s no longer the case. Obviously, then not much will be left for the heirs.”

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