World’s Most Indebted Households Face Rate Pain: Nordic Credit

World’s Most Indebted Households Face Rate Pain: Nordic Credit

By Frances Schwartzkopff  Jun 26, 2013

Danish consumers, who owe banks more than three times their disposable incomes, are about to find out how sustainable that debt load is as interest rates rise.

Signals from the U.S. Federal Reserve that it’s preparing to scale back monetary stimulus have already sent mortgage costs higher as yields rise across global bond markets. The Nykredit Index of Denmark’s most traded mortgage bonds sank this week to its lowest in more than four months after investors sold assets once coveted for their haven status.Though the government and central bank have long argued Denmark’s private debt burden is backed by some of the world’s biggest pension savings, record consumer borrowing has prompted warnings from the European Commission and the International Monetary Fund. The Systemic Risk Board in Copenhagen said this week it will investigate private debt growth in response to international concerns.

“We have decided to initiate an analysis to see if there is a risk to the systemic stability,” central bank Governor Lars Rohde, who heads the board, said in an interview. Though recent studies suggest a “significant level of robustness,” the board has “noted that others outside the country have a different understanding.”

Stable AAA

Mortgage holders in Denmark relied on the government’s stable AAA credit grade to finance debt at record-low rates during the fiscal crisis in Europe. While the Organization for Economic Cooperation and Development estimates Danish households owed 310 percent of disposable incomes in 2010, government debt is less than half the euro-zone average at only 45 percent of gross domestic product this year, the European Commission estimates.

Yet demand for assets sold out of Denmark, Norway and Sweden has faded amid signals since May that the Fed will start removing stimulus from the world’s largest economy. Fed Chairman Ben S. Bernanke said last week that the U.S. central bank will probably taper its $85 billion monthly bond buying in 2013 and halt it mid-2014 as long as the economy performs in line with projections.

The yield on Denmark’s benchmark 10-year government bond soared to 1.96 percent on Monday, its highest since March last year. The yield on the Nykredit Realkredit A/S 3.5 percent mortgage bond due October 2044 soared 10 basis points on Monday to 3.72 percent, according to generic price data compiled by Bloomberg. That yield was as low as 3.33 percent last month.

Liquidity Focus

“There’s been a sell-off in a lot of markets in part because of the focus on liquidity,” Christian Heinig, chief economist at Realkredit Danmark A/S, the mortgage arm of Danske Bank A/S (DANSKE), said by phone. “We have an extraordinarily high level of gross debt so households are vulnerable if interest rates increase.”

Still, any new study will show that Danish borrowers are backed by “pension savings, and the benefits of the welfare system, including a safety net for the unemployed,” Heinig said. “People don’t have to save as much.”

Banks have been warning households of the risk of higher interest rates, helping them prepare for an increase in borrowing costs, according to Nordea Kredit, a unit of Nordea Bank AB. (NDA)

‘Negative Impact’

“Rates have gone up considerably, there’s no doubt,” Lise Nytoft Bergmann, chief analyst and housing economist at Nordea Kredit, said in a note yesterday. “But the increase has been expected for some time, even though it’s come later and at a faster tempo than we’d first anticipated.”

Households are heeding the warnings. Deposits with the country’s lenders climbed last month by 7 billion kroner to 858.7 billion kroner, the central bank said today.

“Danes’ budgets are well padded,” Johan Juul-Jensen, consumer economist at Nykredit A/S, said in a note. The record high savings rate reflects “we are worried about the future and continue to hold back on consumption,” he said.

Some analysts question the wisdom of relying on pension savings to offset debt burdens. The IMF warned in December pension assets can prove hard to tap in times of financial turmoil.

“We have been concerned about the debt levels for some time, and we do not believe the pension assets make any real difference,”Andreas Hakansson, a Stockholm-based bank analyst at Exane BNP Paribas, said in an interview. “However, reducing the debt level is not easy given the negative impact on the real economy.”

Krone Dynamics

Denmark’s $550 billion mortgage bond system — the world’s biggest per capita — is dominated by top-rated covered bonds. The market has proven largely immune to a more-than 20 percent slump in Danish property prices since their 2007 peak as investors fleeing southern Europe bought up the bonds last year.

Denmark’s haven status forced the central bank to cut rates last year to unprecedented lows as policy makers defended the krone’s peg to the euro. The bank’s deposit rate has been negative since July last year, while the benchmark lending rate was cut to 0.2 percent in May, following a quarter-point cut from the European Central Bank to 0.5 percent.

Yet demand for kroner has faded and the central bank has started reversing course. Since peaking at 514 billion kroner in August, the central bank has sold currency to reduce its reserves to 492 billion kroner in May.

The bank has shown in the past it’s ready to act fast to adjust rates in response to exchange rate swings. In 2008, after the failure of Lehman Brothers Holdings Inc., a liquidity crisis triggered a krone sell-off, forcing the central bank in Copenhagen to raise its benchmark lending rate as high as 5.5 percent in October of that year.

Countercyclical Buffers

“There are still grounds for looking at dynamic consequences of the household debt level,” Rohde said.

The Systemic Risk Board also recommended a Jan. 1, 2015, deadline for establishing rules for imposing additional capital requirements on banks to counter surges in credit growth. Early implementation of countercyclical buffers, which could initially be set at zero, would be a “precaution,” Rohde said.

“It’s sensible to have it in place if we come into a period with strong credit expansion and a risk of overheating,” he said. “There is not, at this point, anything that points in that direction, but it can’t be entirely excluded.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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