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Copen haven

21 June 2012 By Ian Campbell

European and triple-A rated? Tick. Definitely not in the euro zone? Tick. No external financing gap? Tick. With at least a few solvent banks? Yes! Denmark ticks all the boxes. It is a safe haven. Unfortunately, the little country – 5.5 million people – is crowded these days and it is charging investors to park their assets in the harbour.

Denmark is attracting euro refugees. What investors are buying is not a proxy for the euro – which the Danish krone has shadowed at a close to unchanged rate throughout the common currency’s existence – but a proxy for the Deutschmark. Were the euro to break up, Germany would have a strong currency and the krone would be likely to shadow it. The krone could rise then sharply – but only in case of disaster.

Denmark should be able to keep its strong-as-Germany currency promise, because it is like Germany, only better. Danish government debt is a little below 50 percent of GDP – far better than Germany’s 82 percent, and Copenhagen isn’t saddled with euro zone bail out problems. Like Germany, Denmark runs a healthy current account surplus – more than 5 percent of GDP. While the Danish fiscal deficit will rise above 3 percent of GDP next year, that aberration should prove brief.

Unlike Greece, Spain, Portugal or Italy, Denmark doesn’t need foreign financing. That makes foreigners all the keener to supply it. These refugees are becoming a problem for the Danish central bank, the DNB, though not yet on a Swiss scale. The krone has risen against the euro by a miniscule 4 cents, less than half of one percent. To prevent further appreciation the DNB is buying up euros, expanding its forex reserves by 11 percent in the past year, and driving down interest rates to pitiful levels. A sale this week of 2-year notes produced a negative yield of 0.08 percent.

You can’t lose in the Danish harbour. But you have to pay to get in. And you won’t win – unless Germany ships out of the euro.


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