OECD Says Denmark Ignores Debt at Own Risk as Higher Rates Loom

Denmark needs to put in place policies that help households deleverage before central banks start raising interest rates, according to the Organization for Economic Cooperation and Development.

“Sooner or later rates in Denmark and the rest of Europe will go back to more normal levels,” Robert Ford, deputy director at the Paris-based OECD, said in an interview in Copenhagen. The nation’s household debt level is “a risk. It’s very high compared to any other.”

At 321 percent of disposable incomes, Denmark boasts the world’s highest private debt burden. Though that’s backed by pension savings and home equity, the nation’s borrowing rate has become a vulnerability that policy makers can no longer afford to disregard, according to the OECD.

“They should consider reducing it or make sure that households aren’t extending themselves in an imprudent way,” Ford said. “Not because we have any particular evidence there will be a problem, but, you know, the U.S. got into big troubles because of non-amortized loans.”

Denmark has emerged as Scandinavia’s weakest economy after a property boom turned to bust in 2008, wiping out 62 community banks in the years that followed and stretching household finances as loans swelled relative to home values.

Borrowing Spree

Though Denmark boasts a public debt load that is less than half the average in the euro area, the nation’s stable AAA rating has helped drive down borrowing costs, perpetuating a borrowing spree that the International Monetary Fund has also warned poses a risk.

Yet policy makers argue that such warnings fail to take into account households’ financial buffers.

Central bank Governor Lars Rohde says most Danish households would survive a jump in interest rates or a loss of income.

“By far the major part of Danish households’ debt is carried by families who are robust enough to be able to handle shocks to interest rates or incomes,” Rohde said Jan. 6 in a written reply to questions. “The threat to financial stability from that corner is therefore not serious in the current situation.”

Finance Minister Bjarne Corydon says critics don’t understand the Danish model.

Danish Model

“Before painting a picture that we’re in an unsustainable, unhealthy situation, you have to consider how much we’re saving,” Corydon said in a Jan. 7 interview. “We’re saving an extreme amount in this field. We have to explain to people outside of Denmark the special Danish way of doing things.”

Danish households held net assets worth 2.45 trillion kroner ($448 billion) at the end of September, or almost 1 1/2 times gross domestic product, the central bank said last month.

Still, Ford warns that many households face a jolt as amortization requirements kick in on the first batch of interest-only loans offered by mortgage banks a decade ago.

“Because of the payback of non-amortized loans,” combined with “rising interest rates, there’s going to be more strain on the financial system and households. You want to make sure now - - not later -- that they’re in good shape. Now is the time to do it.”

In neighboring Sweden and Norway, policy makers have warned consumers and banks against amassing more debt. Sweden, the largest Nordic economy, has seen its private borrowing rate rise to almost 180 percent of disposable incomes, while Norway’s households owe their creditors about double their disposable incomes.

Setting a cap would be advisable, though deciding on a level may prove difficult, Ford said.

“I don’t have a specific number in mind,” he said. “I don’t know of any magic formula or models on housing prices that shows things will suddenly fall apart at a certain level.”

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