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Portfolio > Mutual Funds > Bond Funds

Turbulent Seas Challenge the Wind in Denmark’s Sails

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Denmark’s prime minister got a shock after winning parliamentary approval for a consortium made up, in part, of Danish pension funds and led by Goldman Sachs to purchase 18% of government-owned Dong Energy. Six of her cabinet ministers abruptly resigned and the Danish population is flocking to sign a petition against the action.

The country’s strong independent streak has made it a euro-skeptic. While it is a member of the European Union, Denmark is no carbon copy of its fellows. In 2000, its population voted against adopting the euro to replace the krone, although its currency’s value is pegged to the euro. The country’s attitude is longstanding; Danes also voted against ratification of the Maastricht Treaty because of its articles proposing monetary union and a common European defense force. Denmark had to be granted exemptions from both provisions before the treaty was finally approved.


The country has taken exception to Europe’s way of doing other things, as well. Its policies on immigration have tightened over the last several years, to the point that some say they exceed accepted requirements elsewhere in Europe. Apparently, the criticism has taken its toll; currently looser regulations are set to take effect later this year.

But a strong economy that weathered the global turndown relatively well, coupled with a strong social safety net, has kept unemployment low—although higher than usual for Denmark, at 6% it compares favorably with the rates in other EU countries—and provided a degree of comfort to its citizens regarding health care and education that have made it the envy of other nations and a popular destination for immigrants seeking a better life.

Denmark’s energy policy, too, is progressive, geared toward making the country 100% reliant on renewable energy by 2050—a goal it’s well on its way to meeting. Its wind power generation capability is increasingly exceeding 100% of the country’s needs as tracked on its real-time power sector overview website. In fact, it’s able to export wind energy to its neighbors when more than 100% capacity is reached.

Perhaps that’s why the population got so stirred up at the thought of an outside agency taking control of its power utility. Prime Minister Helle Thorning-Schmidt was unprepared for the reaction to the sale. One party left her coalition government over the issue, leaving the strength of her remaining allies in doubt.

The vision of Goldman Sachs controlling the country’s energy grid, in however small a degree, has not sat well with Danes, despite the firm’s declaration that it regards the $1.5 billion purchase as a long-term investment and that it will support current management’s strategies. Dong was in need of an infusion of cash and was in fact in the process of restructuring. And, should Goldman’s declaration be true, the flap over energy production may turn out to be a tempest in a teapot.

Still, something could be rotten in the state of Denmark. Although it weathered the global recession better than most, its economy is the weakest of the Scandinavian countries, and its consumer debt level the highest with its citizens owing a whopping 321% of their disposable income, it’s a world record. People who owe so much can’t spend much to reinvigorate or sustain the Danish economy, despite their relatively high savings rates, which in 2012 were estimated at 22.6% of GDP. That figure had fallen from higher levels in earlier years. And if they do cut back on their debt, that will slow both GDP and bank earnings; the latter has already caused some analysts to regard the Danish banking system warily.

Concern over that record debt level has also spurred a warning from the Organization for Economic Cooperation and Development (OECD) that something must be done. And something might be done; Denmark’s financial regulator is considering tougher lending laws that would crack down on easy money. Some 57% of mortgages are interest-only, with 66% financed by short-term mortgage bonds.

And therein lies the rub. “Covered” bonds, those backed by mortgages, are in danger from new liquidity rules for banks and mortgage firms. The European Banking Authority (EBA) said in a report that the Danish market for such bonds would come out the loser when those rules go into effect. The liquidity coverage ratio (LCR) could take a toll on both the amount of mortgage lending and the price at which such loans are available, the regulator said.

“The move to a system where these [covered bonds] will be limited to playing a smaller role will have a detrimental impact on the Danish covered bond market,” the EBA said in its report.

The EBA has suggested to the EU Commission that Danish covered bonds should not be classed among the top tier of assets considered appropriate to make up the liquidity buffer, set to begin to take effect in 2015. If that happens, banks could only use those bonds to cover up to 40% of their liquidity requirements. Government bonds, on the other hand, would be acceptable for 100%.

Danish government bonds, according to Anders Jensen, who heads Nordic banking group Nordea, are insufficient to allow the country to rely on them exclusively to meet the buffer requirements. Should Denmark not be able to rely on using covered mortgage-backed bonds, the country’s entire economy could suffer.

A decision on the LCR rule is expected from the EC by the end of June. Denmark, no doubt, will be anxiously awaiting the verdict. Perhaps, in the meantime, it might want to review the advice Polonius gave to Laertes about debt.


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