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Denmark's Subzero Rate Adventure

Denmark is using negative interest rates to discourage outside capital
The headquarters of Danske Bank, left, stand opposite the Danish central bank in Copenhagen
The headquarters of Danske Bank, left, stand opposite the Danish central bank in CopenhagenPhotograph by Linus Hook/Bloomberg

Plenty of central banks around the world have cut rates almost to zero. Denmark has been even bolder: On July 5 the central bank cut deposit rates to minus 0.2 percent (that’s the rate offered to banks that want to park their funds at the central bank). Earlier, in June and July, Denmark had sold two-year debt with negative yields ranging from minus 0.05 percent to minus 0.08 percent. The country is making banks and investors pay for the privilege of converting their money to kroner. Switzerland, Germany, and France have all sold debt with negative yields recently.

Denmark’s currency is pegged to the euro. That makes sense, since the Danes mainly trade with countries in the euro region. The peg minimizes disruptions in trade by keeping the two currencies closely aligned. Now Denmark is struggling to keep the peg intact as investors flee the euro area for safer countries. Along with Sweden, Denmark is a favorite destination. Its current-account surplus, which measures trade and investment flows in and out of a country, reached a record high in May of 13.7 billion kroner ($2.3 billion) as the scared money poured in. All that foreign capital has put upward pressure on the krone: Though it’s still unlikely to happen, the fear is that Denmark would have to abandon the euro peg. In that case the krone would appreciate in value and the country’s exports would suffer. Negative rates are the Danes’ answer. They’ve already had an effect. The central bank’s deposit facility had 147.5 billion kroner as of July 10. On July 4 it was 186.3 billion.