Hedge Funds With Overblown Debt Fixation Spark Danish Rebuke
Danish Finance Minister Bjarne Corydon criticized hedge funds and other foreign investors speculating against the nation, arguing their bet is based on a false picture of household finances.
“From a macroeconomic perspective I think the writing and talking about this part of the Danish economy is blown somewhat out of proportions,” the 41-year-old said yesterday in an interview at his Copenhagen office.
The safety of investing in Denmark has been called into question by hedge funds and asset managers, who are betting against the AAA-rated nation after consumer debt swelled to a world-record of more than 300 percent of disposable incomes. Yet consumers taking advantage of record-low interest rates have also built up some of Europe’s biggest pension savings. That, together with other assets, means Danes enjoy net assets, Corydon said.
Households’ net wealth climbed to 5.98 trillion kroner ($1 trillion) at the end of 2012, equivalent to 328 percent of gross domestic product, according to the nation’s statistic office. Danes held 2.5 trillion kroner in pension savings.
“What’s basically missing from their analysis is the other part of the equation: the Danish pension systems,” he said. “If you look at the net position of middle-class Danish households it’s very, very sound, and you tend to miss that if you just look at the housing side of the equation.”
Owl Creek Asset Management LP, one of last year’s best-performing hedge funds, shorted Danish bonds and bought credit protection on its biggest lender, Danske Bank A/S (DANSKE), two people familiar with the matter said in February. Then last month, Arbuthnot Latham & Co., a London-based asset manager overseeing about $1 billion in funds, said it’s betting against the krone in anticipation of declines.
“To bring debts down gradually in a solid, stable, gradual way would not be a bad thing to Denmark,” Corydon said. Still, he warned against resorting to “shock solutions” to reduce borrowing.
The nation’s biggest mortgage bank, Nykredit Realkredit A/S, says shorting Denmark is unlikely to pay off. Danish mortgage bonds, about 80 percent owned by domestic investors, have outperformed U.S. Treasuries since the height of the global financial crisis, according to data compiled by Bloomberg.
The country’s economy and the housing market are also on the mend, according to Corydon. After slumping 20 percent after the bubble burst in 2008, real estate prices are rising again. House prices rose 3.4 percent in February from a year earlier, Statistics Denmark said last week. The number of homeowners unable to meet their payments dropped to a half-decade low in the fourth quarter, Nordea Bank AB (NDA) said on May 2. The Nykredit Index of Denmark’s most-traded mortgage bonds rose to a record high yesterday, reaching 418.30.
In March, Danes held 819 billion kroner in domestic bank accounts, down 8.4 billion kroner on February, as consumers became less nervous about their jobs and more comfortable spending, Johan Juul-Jensen, an economist at Nykredit Realkredit A/S in Copenhagen, said in a phone interview. “More spending is the one thing we’ve been missing from the picture of a recovering Danish economy and lower deposits indicates its underway.”
The housing recovery, which has seen apartment prices rally about 17 percent in Copenhagen over the past year, has also raised concern another housing bubble could be inflating in the largest cities. Prices have been supported by record low interest rates and Danish consumers’ reliance on interest-only mortgages.
“For Copenhagen and other major cities there’s definitely a recovery and it’s coming rather fast, while the picture remains rather grey in other parts of Denmark,” he said. Price levels in Copenhagen aren’t “extreme,” he said.
Corydon said he’s committed to policies that keep interest rates low within the framework of the county’s peg against the euro. Though Denmark is on its way out of the European Union’s watch list on deficit limits, the government will keep targeting tight fiscal policies, according to Corydon.
“The budget numbers in Denmark are to the limit of budget rules in the fiscal compact,” he said. “It’s what we want to do because we want to sustain growth as much as possible within the limits of the regime. But there’s no room to go further.”
The European Commission yesterday in new forecasts predicted the Danish government would have a 1.2 percent deficit of gross domestic product this year and a 2.7 percent shortfall next year. The economy will expand 1.5 percent this year and 1.9 percent next year, the commission predicted.
Corydon, a father of four and former chief of staff to Prime Minister Helle Thorning-Schmidt, has headed the government’s least popular initiatives since it came into office in 2011, including limiting unemployment and student benefits and a school reform requiring teachers to spend more time at work without extra pay.
Denmark’s central bank last month raised its deposit rate, bringing it above zero for the first time since July 2012, to defend the krone’s peg to the euro.
Corydon said the government would “soon” release a new plan to further boost the structural potential growth of the economy, part of plan to add 20 billion kroner ($) in output by 2020. So far, it has produced 6 billion kroner of this plan, according to the finance minister.
“This reform will be another step in the right direction,” he said.