Denmark’s government rejected a report it could consider imposing capital controls as policy makers and economists try to explain the mechanisms through which the nation’s currency regime operates.
“The government has no plans to impose restrictions on capital movements,” Sigga Nolsoee, spokeswoman for Economy Minister and Deputy Prime Minister Morten Oestergaard, said in a phone interview on Monday.
Since Friday, when some media reported that Denmark might consider enforcing capital controls, the nation’s biggest banks have tried to reassure clients that such speculation is groundless. Danske Bank A/S notes that Denmark’s position inside the European Union’s single market means it must allow the free movement of capital. What’s more, imposing capital controls makes little sense when a central bank is fighting a capital influx.
The notion that Denmark could use capital controls “should be regarded as unthinkable and thus not be a worry to the market,” Danske Bank senior analyst Jens Naervig Pedersen said in a note to clients on Monday.
In reports by Reuters and the Telegraph, Hans Joergen Whitta-Jacobsen, the head of Denmark’s Economic Council, is quoted as saying the country could impose capital controls. Whitta-Jacobsen, who doesn’t advise the central bank, has since said he doesn’t think such a measure is necessary or likely.
“I never advised the central bank to impose capital controls and I don’t expect they will be used,” he said in an interview. “I’m not an adviser to the central bank or the government, I’m an independent expert.”
The central bank said it would never consider imposing any measures that were illegal and in conflict with its obligations inside the EU’s single market.
Nordea Bank AB, Scandinavia’s biggest lender, is advising clients to take Whitta-Jacobsen’s comments, which helped drive the krone lower on Friday, with a “grain of salt.” Both Nordea and Danske say they expect demand for kroner to return.
The confusion is the latest test of Denmark’s ability to manage its euro peg. Since Switzerland’s Jan. 15 decision to sever the franc’s ties to the euro, the Danish central bank has fought back conjecture it would be next. Its efforts to counter demand for AAA-rated Danish assets have included record krone sales and rate cuts, bringing the benchmark deposit rate to minus 0.75 percent.
“We remain concerned primarily with EUR/DKK downside pressure,” Pedersen at Danske said. “Fundamentally, Denmark has an unsustainably high current account surplus, above 6 percent of gross domestic product, which supports a strong krone.”
The central bank’s job is to target 7.46038 kroner per euro inside a 2.25 percent tolerance band. In practice, it doesn’t allow swings greater than 0.5 percent. The krone strengthened as much as 0.08 percent to 7.4563 per euro as of 12:54 p.m. in Copenhagen, its biggest gain since Jan. 27, according to closing prices.
The central bank will probably continue with currency-market interventions to prevent the krone from strengthening but is unlikely to cut the deposit rate again in the coming 12 months, according to Danske Bank. Currency reserves probably will grow to “well above” a record 650 billion kroner ($99 billion) in February, Danske estimates.
In a report published on Monday, Fitch Ratings said Denmark’s defense of its euro peg “looks credible.” Still, measures pushed through to date pose risks to the financial industry, the rating company said.
Denmark’s negative deposit rate could “reduce bank profitability by reducing net interest margins, as they will be difficult to pass on to retail depositors,” Fitch said. “More broadly, there is a risk that monetary easing to defend the peg will result in a build-up of credit risk in the financial system.”