Denmark: Unusual Developments In Central Bank Deposit & Lending Rates

By Tom
Updated on

What is going on in Denmark as You read?

Something is up. So much is clear; but it is very uncertain. If I knew, I most certainly would not be in a position to spread it all over the internet!

What I CAN do, is present the evidence as I see them and let the reader draw his own inferences.

Unusual developments in CB deposits rates, interest rates of Danish sovereign bonds.

Denmark: Unusual Developments In Central Bank Deposit & Lending Rates

There are several interesting features:

1)      An interesting spike in the CB deposits as of April 20th. Checking just now, this has been “corrected” 200 bio. DKK down. I choose to leave it, as I doubt very much it is a clerical error – and it is more or less standard procedure in the CB to correct figures backwards in time – presumably when they get an agreement on what the “truth” is – or rather was.

In the present context I wouldn’t put too much weight on it, as it presumably was in the context of extending a loan to Danske Bank of 41 bio. DKK facilitated through the ECB/EFSF.

That is not a conspiracy – it is management. We are not dealing with lies; but with managed truth.

2)      The interest rate on the sovereign bonds has dropped steadily since April 23rd – well steadily and steadily – since the middle of May at an alarming rate.

And on May 25th the two year sovereign bond broke into negative territory.

3)      The CB bank deposit and lending rates have been adjusted downwards twice within the last fortnight. On May 25th the rates were reduced with .1% to .6% and .2% for lending and deposits respectively. Then on June 1st (yesterday) with a further .15% to .45% and .05% respectively.

Apparently the first reduction was met with inner indifference by the market. Furthermore a clear threat has been issued in connection with the second lowering: The CB has ways and means to deal with negative interest rates on lending and deposits.

The CB has openly admitted to having intervened defending the currency during May.

4)      Once a month all banks are obliged to pay in their internal clearances in full to the Central Bank. On Dec 30th there was a flap, as Danske Bank didn’t! It is pretty certain it was Danske Bank, as only customers with accounts in Danske Bank seem to have been affected. An emergency credit was extended – presumably with a severe admonishment to Danske Bank to not pay with money they didn’t have. Since the aforementioned loan this hasn’t repeated itself.

Now data are not available later than Wednesday’s: That is quite usual. But that could explain a deposit sum just shy of 200 bio. DKK Thursday or Friday – which has since been corrected downwards with 10-15 bio. DKK to the present 186.8 bio. DKK.


It is a small secret that the EUR has dropped with respect to the USD in the last month or so – that is reasonably understandable on the background of the Greek farce and the Spanish pains.

Furthermore the German sovereign bonds are getting expensive – which in view of a – say 100 bio. EUR – outflow of cash from Spain the last couple of months was to be expected. What is NOT explained is:

A)     Last I heard, the 10 year German sovereign bond was yielding (if that is the term) 1.37% and the Danish ditto (Wednesday) was 1.16%.

B)     If there was just a normal run the structure of the different maturities on sovereign bonds would open up – i.e. the drop in interest rate would be more pronounced the shorter the maturity. This hasn’t happened with Danish sovereign bonds.

There has been some increase in deposits in the Danish CB, but nothing particularly breathtaking of late. That is strange, as you should think people would rather have .3% on deposits in the CB with a week’s maturity than -.1% with 1-2 years maturity.

Now there aren’t any short term sovereign bonds in Denmark, but as of April 30th quite a lot of treasury notes (short term, no interest sovereign bonds) abroad – say 40 bio. DKK.

Still the 10 year sovereign bond follows in step with the shorter term securities – rather precisely in fact! It is true that investors abroad has also taken a fancy to long term Danish sovereign (how much abroad that really is – that is a totally different issue) despite their sub-German yield; but so has domestic investors.

This last fact may be due to conversion of real estate mortgages to a lower coupon interest rate – but again: Apparently there has not been issued sufficient fixed rate convertible maturities to satisfy the demand from investors (pension funds, insurance companies, etc.). The flexible interest bonds have their debtors concentrated in the most foreclosure prone segment of home owners, so they are toxic waste to investors – other than issuers.

The role of EU

Sometimes you should look away from the screen and listen to what others say.

1)      The EU Commissions chairman Barroso has presented Denmark with a report card (the other EU member has also received theirs) where he wrinkles his brow at the very high Danish private debt. Home owners debt alone is in fact 93% of GDP. Indeed cause for “concern” – official code talk for “panic”.

2)      Secretary for Economics Margrethe Vestager openly admits “attention” to the problem.

Such statements are not to be taken lightly and considering the condescending tone used to Spain for not having shown due diligence to problems they should have been aware of for a long time, then quick action is called for.

The tax-reform

A major tax-reform has been in the making for some time and has provoked the extreme leftist party that normally is the support of the Danish minority government into livid rage.

Up to Thursday/Friday the Liberals (major opposition party) has clearly stated that decreasing the interest deduction and at the same time relieving taxed isn’t really leading anywhere as the highest incomes are the ones most in debt.

In the past week the leader of the opposition, the Liberal Lars Løkke Rasmussen, openly asked Prime Minister Helle Thorning-Schmidt – still on the rostrum of parliament – IF there was any chance of real reduced taxes. If there wasn’t then there would be no point in meeting.

This is a technique he introduced during the election campaign: Confront the Prime Minister on prime time TV – or at any other time, where she can’t run away – she is one slippery customer. A method of opening negotiations that is somewhat unconventional, as what is said in “open court” in parliament is generally known in detail by both sides beforehand.

Now this morning (Saturday) there had been talks, and Lars Løkke Rasmussen stated that a business investment initiative of a tax-deduction of 115% on business investment was urgent. The talks continue tomorrow. The Secretary for Finance Bjarne Corydon openly admitted that “taking responsibility – and doing business” would lead to admissions from the government.

What remains a mystery is where Margrethe Vestager, Secretary of Economics – and the brain in the government, is in all this? Is she occupied elsewhere this weekend? Where is the Prime Minister leaving a vital comment to her minion? Hmmmm.

Now that may just be a pretext (or rather a managed truth) for further talks.

As an aside: Bank claques have made a recent reappearance on debate fora!

Where does this lead us?

1)      A definite precarious situation on the currency with a massive pressure on the DKK for revaluation (the last thing the export needs). The measures taken – rather violent, considering that Denmark has gone alone cutting interest rates and not waited till the EU did the same – has apparently been to no avail! This indicates severity and urgency.

2)      The EU Commissions chairman pointing directly at the festering wound in the Danish economy – the home owners private debt. This also indicates acknowledged severity and urgency.

3)      Ongoing talks about a tax-reform – which could go some way to save some home owners from financial failure: The tax-rebate on investment is in my opinion a side issue. More attention should – in my view – be attached to the stress on urgency.

4)      The continued negotiations tomorrow (Sunday) – well something can’t wait till Monday!


I would not be the least surprised if at the opening of the stock exchange a radical action concerning the banking and mortgage banking system is taken.

The indicators are there: A broad political agreement (excluding the bankers “Punch and Judy”- parties), an involvement of the Central Bank (interest rate), an involvement with the EU (the debt issue), negotiations when banks are closed (just after end-of-month) and the stress on urgency.

I might be wrong, but to me the indicators are there.

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