World-Beating Debt Burden Is No ‘Serious Threat’ to Denmark

World-Beating 321% Debt Burden Is No ‘Serious Threat’ to Denmark

Danish central bank GovernorLars Rohde said most of the nation’s households would survive a jump in interest rates or a loss of income as Denmark tops world debt rankings.An investigation into household borrowing revealed that high indebtedness curbed spending and economic growth during the financial crisis, the Copenhagen-based Systemic Risk Council, which Rohde chairs, said yesterday. Still, those findings aren’t grounds for alarm, according to Rohde.

“By far the major part of Danish households’ debt is carried by families who are robust enough to be able to handle shocks to interest rates or incomes,” Rohde said yesterday in a written reply to questions. “The threat to financial stability from that corner is therefore not serious in the current situation.”

Danish households owe their creditors 321 percent of disposable incomes, according to the Organization for Economic Cooperation and Development. That’s the highest ratio in the world and a level that has prompted warnings from both the OECD and the International Monetary Fund to rein in borrowing. Danish authorities have argued that households aren’t at risk thanks to high pension and household equity levels.

Swedish Cap

In neighboring Sweden, central bank GovernorStefan Ingves has suggested capping household indebtedness, not adjusting for assets, at 180 percent of disposable incomes. In Norway, the central bank has cautioned against further private borrowing after households owed their creditors about 200 percent of disposable incomes.

The Paris-based OECD said in November that policy makers in Scandinavia need to do more to stem risks posed by household debt growth.

Referring to its Dec. 20 meeting, Denmark’s Systemic Risk Council said an analysis suggested that households with high debt levels as of 2007 were prone to spend less during the crisis.

“That has probably contributed to a weaker development in private spending and economic activity in recent years, and has affected the financial industry. The council will return to this matter,” it said.

Denmark emerged as Scandinavia’s weakest economy after a housing boom that peaked in 2007 burst a year later. As many as 62 community banks failed during the ensuing slump, according to a September report by a government-appointed committee.

AAA Debt

The nation’s AAA-rated government debt load is less than half the euro-zone average, helping keep mortgage borrowing costs low and supporting households. The central bank, which uses monetary policy to defend the krone’s peg to the euro, resorted to negative rates in 2012 to counter a capital influx. Denmark’s benchmark deposit rate, now minus 0.1 percent, has stayed below zero since July 2012.

Gross domestic product contracted 0.4 percent in 2012 and grew just 0.3 percent last year, the European Commission said in November. Growth is set to accelerate to 1.7 percent in 2014, compared with a rate of 2.8 percent in Sweden, according to the commission.

Denmark’s Systemic Risk Council was created last year with a view to advising lawmakers on financial imbalances that may warrant a legislative response. The council also said yesterday it will examine potential risks to financial stability posed by the repo market.

“Increased use of repos and re-use of collateral can in some situations render the financial system more vulnerable,” the council said. It has therefore “decided to do more work on the subject,” it said.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net