Denmark’s AAA to Survive World’s Biggest Private Debt Load, Fitch, S&P Say
Denmark, home to the world’s biggest household debt burden, won’t lose its top credit rating any time soon as stable public finances and a current account surplus offset the risks, Fitch Ratings and Standard & Poor’s said.
“Denmark is not a country we are particularly worried about,” Fitch Managing Director Edward Parker said in an interview in Stockholm yesterday. “We are not expecting over the near term to be taking negative action on Denmark.”
Denmark, which is struggling to emerge from a burst housing bubble and regional banking crisis, is lagging behind its Scandinavian neighbors on economic growth and budget deficit reduction. Still, bond investors are rewarding the government for a public debt burden that’s half the euro area’s average and snapping up Denmark’s debt. The Nordic country pays about 10 basis points less than Germany to borrow for 10 years.
Investors haven’t been swayed by Denmark’s record private debt burden, which at 310 percent of disposable incomes in 2010 is the world’s biggest, Exane BNP Paribas estimates. Instead, markets have focused on public debt in their hunt for havens.
“Household debt is not a ratings driver, per se,” Per Tornqvist, an analyst at S&P based in Stockholm, said yesterday in an interview. “Denmark is still a manageable situation, particularly if you consider that this is a country that is exporting capital. A country that exports capital is not the country with the biggest challenges in today’s world.”
The yield on Denmark’s 10-year government bond eased two basis points to 1.67 percent as of 9:32 a.m. in Copenhagen, outperforming moves in Swedish and Norwegian debt markets, where 10-year yields rose.
Denmark is one of only 12 nations in the world that still has an AAA rating at S&P, Moody’s Investors Service and Fitch after France and Austria were cut at S&P last week. Prime Minister Helle Thorning-Schmidt, whose Social Democratic government won power in September, has said the Nordic country can’t save its way out of the crisis and has moved forward investments worth 18.8 billion kroner ($3.19 billion) for this year and next.
The $300 billion economy will grow 1 percent this year and in 2013, according to Danske Bank A/S, the country’s biggest lender. The economy shrank 0.5 percent in the third quarter. The budget deficit will swell to 5.5 percent of gross domestic product this year from 4 percent last year, the government estimates. The current account surplus surged to a record 12.6 billion kroner ($2.2 billion) in November.
Denmark, which has opted out of the euro though it pegs the krone to Europe’s single currency, will have government debt of 45 percent of GDP this year, compared with a euro-area average of 90 percent, the European Commission said Nov. 10.
Still, continued spending will undermine Denmark’s public finances and leave the ratings companies with little alternative but to cut, according to Claus Caroe, a fund manager at Sparinvest A/S.
“If no action is taken, it’s likely Denmark will lose its AAA and foreign investors will need to look elsewhere for security,” Caroe said.
Bond investors should already be pricing in the risks, said Andreas Hakansson, an analyst at BNP.
“The base case is that Denmark remains AAA, but there’s a higher risk that Denmark gets downgraded than Sweden or Norway,” he said in an interview in Copenhagen. He sees the biggest risks to the economy stemming from the housing market.
“If house prices started to go up, it would be positive. If they don’t, it could make the problem even worse,” Hakansson said. “We’re talking about a big squeeze. I think people are going to look at it this year.”
It costs 92 percent more to insure against a Danish default than it does to guard against a credit event in Sweden, default swap contracts show. Credit default swaps on Danish debt have surged more than 200 percent since the end of June.
Property prices may fall a further 10 percent until 2013, bringing aggregate losses in the housing market to 25 percent since just before the crisis hit, the government-backed Economic Council said in November.
“There are problems in Denmark and they can’t be left unattended,” said Tornqvist at S&P. “But in a global comparison, Denmark is still doing comparatively well. We would expect the Danish economy to be doing a sideways movement in the coming year, with growth slightly above zero, and if growth is between zero and 1 percent, that is boring from all sorts of aspects, but it’s not a disaster.”
Moody’s has warned that Denmark’s $480 billion mortgage- bond market may harbor imbalances as the proportion of adjustable-rate loans swells to make up about half of the total. The rating company in June lowered the so-called timely payment indicator on a number of mortgage bonds to respond to higher refinancing risks, it said.
“If interest rates go up quickly, Danish households would be in much more trouble now compared with previous crises, when basically all loans were at fixed interest rates,” Martin Lundholm, an fixed income analyst at Spar Nord Bank A/S, said.
Denmark’s household debt in 2010 doubled from 158 percent of incomes a decade earlier, according to BNP. While the debt is backed by savings including pensions, those assets are largely illiquid and may be difficult to tap in a credit crunch.
AA ‘New Normal’
“Denmark should not take its AAA for granted as the economy faces some real challenges,” said Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen. “It will be a tough task for the government to meet its pledge of limiting the budget deficit to less than 3 percent by 2013. And at the same time, Denmark is stuck in a low-growth scenario.”
History suggests the fallout from ratings downgrades may be limited. JPMorgan Chase & Co research shows that 10-year yields for the nine sovereigns that lost their AAA status between 1998 and last year’s U.S. downgrade rose an average of only two basis points the next week.
The upshot may be that investors place less emphasis on sovereign ratings in future, Sparinvest’s Caroe said.
“It looks like AA will be the new normal for countries,” he said.