‘Massive Inflow’ Feeds Currency Surplus Gnawing at Denmark’s Peg

  • Danish current account surplus is now approaching 10% of GDP
  • Government says it won’t intervene to address imbalance

It’s not easy maintaining a fixed currency regime when you have one of the biggest current account surpluses in the rich world.

In AAA-rated Denmark, where the central bank defends the krone’s peg to the euro, a surplus approaching 10 percent of GDP is becoming a long-term headache.

After fending off speculators since early 2015, Denmark is now fighting a more amorphous force in its efforts to keep the krone weak. And despite more than four years of negative interest rates, Danes are increasingly saving as foreigners pile into Danish assets.

“This constant, massive inflow is adding a fundamental appreciation pressure on the krone,” Helge Pedersen, chief economist at Nordea in Copenhagen, said by phone. Fresh data published this week show the surplus jumped 28 percent in November from the previous month.

Denmark’s current account surplus has been built up over several decades, becoming an almost structural feature of the economy. “This type of thing tends to become self-perpetuating,” Pedersen said. “Particularly once you become a creditor to overseas markets, you start getting net interest payments and dividends, which just adds even more to the surplus.”

The European Union formulated rules in 2011 designed to prevent the kinds of imbalances that occur when current account surpluses grow too big. A huge surplus is mirrored by a huge deficit elsewhere, with debtor nations facing currency weakness. Germany has come under pressure to address its surplus as Europe’s poorer nations struggle to build export markets.

Administrations overseeing massive surpluses “have to do something about them,” Pedersen at Nordea said.

Denmark’s center-right coalition says it won’t act to curb the imbalance. Economy Minister Simon Emil Ammitzboll argues that the factors contributing toward the surplus, such as pension investments, are “well known” by the EU. Therefore, it’s the government’s “assessment that there’s no need to intervene,” he told Bloomberg.

Meanwhile, the central bank resumed currency interventions last month for the first time since June to weaken the krone. The last time it intervened, it was fighting off safe-haven flows triggered by Britain’s vote to leave the EU.

The bank predicts the surplus won’t drop much below 7 percent of GDP through 2018. Most economists agree Danish policy rates won’t go positive for another two years, at the earliest. That means the imbalances caused by negative rates will continue to feed into the economy.

Economists are already warning that corners of the housing market look seriously overheated. Pension funds are also struggling to generate enough returns to cover their liabilities, forcing them to invest in riskier assets, often outside Denmark.

The OECD estimates that Denmark’s current account surplus reached 9.2 percent of GDP in 2015, beaten only by Switzerland and Ireland. “It’s basically a reflection of the fact that we’re saving too much,” Pedersen said. “And investing too little.”

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