Danish Krone Targeted in Short Trade as Arbuthnot Slams Risk

Arbuthnot Latham & Co. is betting against Denmark’s krone as part of a series of transactions anticipating declines in the Nordic nation’s currency and financial markets.

The London-based asset manager, which oversees about $1 billion in funds, is “shorting the krone,” Gregory Perdon, co-chief investment officer at Arbuthnot, said yesterday by phone. “We’re negative on Danish financial equities, we’re negative on the bonds and on the currency.”

Denmark’s central bank last week raised its deposit rate, bringing it above zero for the first time since 2012, as policy makers in Copenhagen acted to defend the krone’s peg to the euro. The Danish currency has come under pressure as investors return to Europe’s core, buying bonds from nations bailed out during the debt crisis as a recovery in the euro zone revives demand for yield.

Denmark, a AAA-rated nation and home to the world’s largest mortgage-bond market per capita, has maintained a government debt burden that’s less than half the average in the euro area, at about 45 percent of gross domestic product.

For Arbuthnot, the decision to short Denmark’s financial markets was largely based on the nation’s consumer debt burden, which the Organization for Economic Cooperation and Development estimates is the highest in the world, at more than 300 percent of disposable incomes.

Though the government and central bank have argued the debt is backed by home equity and some of Europe’s biggest pension savings, leaving Danes with net savings, those assets may be hard to retrieve in a crisis, according to Perdon.

Debt Pressures

The central bank, which uses interest rates for the sole purpose of maintaining the exchange rate, has urged mortgage lenders to scale back issuance of interest-only loans to encourage homeowners to pay down their debts faster. Parliament has also passed a law designed to reduce reliance on annual refinancing of mortgages as long as 30 years, which the central bank and rating companies had also identified as a vulnerability.

“The government should reduce the number of new interest only loans,” Perdon said. “They should force a reduction of interest only loans and, while they can’t ban them overnight, as the market won’t like that, they should eventually ban interest-only bonds.”

Owl Creek

Other international investors have also bet against Denmark. Owl Creek Asset Management LP, one of last year’s best-performing hedge-fund firms, shorted the nation’s sovereign bonds and bought credit default swaps on its biggest lender, Danske Bank A/S, in anticipation of a debt crisis, two people familiar with the matter said in February.

The same month, Nykredit Realkredit A/S, Denmark’s biggest mortgage bank, warned the bet may backfire. “I don’t think it’s good business to speculate against Denmark,” Chief Financial Officer Soeren Holm said at the time.

The krone traded at 7.4646 per euro as of 9:25 a.m. in Copenhagen, versus 7.4667 on April 23, the day before the central bank raised the deposit rate by 15 basis points to 0.05 percent. The difference in yield on Denmark’s benchmark 10-year bond and similar-maturity debt sold by Germany was little changed at four basis points today, according to data compiled by Bloomberg.

Perdon said Arbuthnot met with members of Denmark’s government and banking industry, as well as academics, before deciding on its investment stance.

According to Jesper Rangvid, a professor at Copenhagen Business School and the author of a government-commissioned report on Denmark’s financial crisis, betting against the nation’s currency is “completely uncalled for.”

Currency Crisis

“A currency crisis would be the biggest threat to the Danish mortgage market, but that won’t originate here,” Rangvid said. “Denmark still has the lowest mortgage rates in Europe so the clear majority of investors certainly still believe in Danish mortgage bonds.”

Since September 2008, the month the failure of Lehman Brothers Holdings Inc. plunged global financial markets into the worst crisis since the Great Depression, Danish mortgage bonds have returned investors 40 percent, according to the Nykredit Index of the industry’s most-traded securities. U.S. Treasuries have returned 24 percent over the same period, according to data compiled by Bloomberg.

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