Danish Sorrows


New CreditVulnerabilityDiscovered

We had to read the headline of a recent Bloomberg article twice to grasp its meaning. See if you can do better: “New Crisis Lurksin Cure forOld as DanishProbeShowsRisks

Say what? What they mean is that a previous credit crisis was somehow ‘cured’ and that now said ‘cure’ threatens to create a new crisis. ‘Danish probe’ is not some unmentionable medical procedure, but is meant to indicate that all of this is happening in Denmark, home to both a recently expired housing bubble and the biggest mortgage credit market per capita in the world. As one might imagine, not exactly a very comforting combination. A government committee is involved in the ‘probing’. So what was the magic cure?

TheoneyearmortgagebondsthathelpedhomeownerskeepupdebtpaymentsduringthetoughestmonthsofDenmark’srecessionnow pose a threattoeconomicstability, according to the head of a government commission investigating the causes of the financial crisis. Thereis a risk, andtheriskisrelativelylarge,” Jesper Rangvid, a professor of finance at the Copenhagen Business School who’s overseeing an 11-person commission due to release its findings next month, said in an Aug. 5 interview.

Denmarkstandsout as theScandinaviannationtohavesufferedmostduringEurope’sdebtwoes. Its debate onhowtoweanhouseholdsoffcheap, yetpotentiallyvolatile, debtechoes a dilemmafacingpolicymakersacrossmuchoftheglobe, wherethe response tooverindebtedness has been to feed demand for borrowing.

Refinancing their mortgages annually saved borrowers as much as 50 billion kroner ($8.9 billion) since Denmark’s housing market collapsed five years ago, the Association of Danish Mortgage Banks estimates. Still, Danes relying on adjustable-rate mortgages took a hit in 2008, when the central bank sent rates to an eight-year high to stop krone assets being dumped.

The one-year bonds have been singled out by the central bank, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings as being risky because they finance mortgages as long as 30 years. Rangvid’s committee will publish its recommendations in September.”

(emphasis added)

Sounds like your typical ‘borrow short to lend long’ Ponzi, which usually works fine, until lenders refuse to provide short term borrowings, which they invariably tend to do at the most inopportune moments. The loans that need to be refinanced annually amount to one third of all residential mortgages in Denmark. We must also correct Bloomberg on one point. Denmark’s housing bubble has not ‘collapsed’ as it asserts above – at least not yet. So far, it has merely wobbled. However, it appears as though prices are at a precipice and given that administered interest rates in Denmark have already been ZIRPed into the ground, it is difficult to see what might keep them from tanking further. Note also that Denmark is a high tax and over-regulated country, a quintessential Scandinavian welfare state, the economy of which has probably only been kept afloat by the population’s diligence and ability to create a measure of wealth even under the quite adverse conditions. Nevertheless, socialism consumes scarce capital, and the country is therefore well placed for a devastating economic bust. Admittedly one should not underestimate the Danes – the ones we know personally are all quite smart.

Denmark’s wobbly, but so far only ‘correcting’ real estate bubble – click to enlarge.

Jaw-Dropping Numbers

Unfortunately many Danish households have not been smart enough to avoid stumbling into a huge debt trap. Household debt in Denmark is the highest in the world. It may in fact not be appropriate to suspect them of lacking common sense. Rather, it is highly likely that the dismal debt situation is an unintended consequence of central planning. For one thing, artificially low interest rates raised the prices of long-lived assets such as houses; for another, they made it appear as though very high debt loads would be easily affordable. Given that Denmark is a high tax socialist welfare state, the cost of living there is extremely high as well, so if people want to buy a home, most of them have to borrow a lot of money to do so. It is moreover in the nature of high tax nations that their citizens have little chance of building up capital. That is the main reason why no Google, Facebook or Microsoft will ever emerge in Europe (that will only become conceivable after the current welfare state system collapses in insolvency). Denmark’s households may simply be victims of circumstances beyond their control, but the fact remains that they have so much debt that it seems impossible to conceive of an easy way out, especially if interest rates should ever be allowed to rise again. In a 2008 survey, the Danes were named the ‘happiest people in the world’. That seems unfortunately likely to change. From Bloomberg:

“Though Denmark’s public debt load is half the euro-zone average, helping transform its bond and currency markets into havens from the turmoil in southern Europe, the nation’s housing collapse has undermined consumer confidence and stunted economic growth.

The $355 billion economy stalled in the first quarter after contracting 0.5 percent last year. Denmark was also in a recession in the final quarters of 2011, according to the statistics office.

Danes bear the world’s highest private debt burden, at 310 percent of disposable incomes, according to the Organization for Economic Cooperation and Development. Though households also boast some of the world’s biggest savings in the form of pensions and home equity, a more-than 20 percent slump in property prices since 2007 has eroded the value of those assets.”

(Emphasis added)

And that is precisely the problem with central bank induced bubbles. Everyone thinks they are getting rich as asset prices inflate. They take on massive debt, as credit is cheap and after all, there are all those assets that are seemingly forever rising in price. Unfortunately, when the tide goes out, asset prices fall, but the debt remains. We wouldn’t be surprised if Denmark’s banks were to get into big trouble. The decline in asset prices to date already indicates that many loans are probably no longer properly collateralized. All that is missing to bring the situation to a head is another downturn of the economy and/or a mass exodus of all that ‘safe haven’ money that has accumulated in Denmark. Note that these inflows were the reason why the central bank has pursued an extremely loose monetary policy in recent years, as it wanted to hold down the value of Denmark’s currency. It may be compelled to tighten policy if the krone weakens a lot once there are outflows.


Denmark is the one Scandinavian country in which an unwinding of the real estate bubble seems well underway (as we have recently pointed out, in Norway the bubble still keeps growing). With household debt at a staggering 310% of incomes, the country’s economic situation is a big accident in waiting, especially in view of the fact that the economies of regulatory welfare states with strong socialistic characteristics are as a rule highly inflexible. This is to say, due to minimum wage laws, high taxes and a thicket of regulations, the economy will have great difficulty to adjust to a bust. All of Europe is in trouble one way or the other, and yet there continues to be a strongly held belief that the central planners and governments that have created the problems in the first place will be able to solve them. The likelihood of this idea working out is somewhere between zero, nil and nada.

The Danish krone versus the US dollar – this chart has a strong similarity to EUR-USD. As Denmark’s central bank has attempted to keep the krone stable against the euro – at great cost – click to enlarge.

Addendum: Lars von Trier Poking Fun at Swedes and Danes

In Lars von Trier’s famed TV mini-series ‘Riget’ (‘Kingdom’), which takes place in a hospital in Copenhagen, there is a Swedish neurosurgeon by the name of Stig Helmer, played by Swedish actor Ernst-Hugo Järegård. He doesn’t like the fact that he has to work in a Danish hospital, and curses the Danes for ‘what they have done to him’ at the end of each episode, calling them “Danskjävlar“ (roughly, Danish bastards, although slightly more forceful terms may actually be a better translation than ‘bastards’. Use your imagination).

Here are two of those scenes (we provide a rough translation of what he says below the videos):

Danskjävlar! Stig Helmer monologue

“Oh my God. The crown ship Vasa [famous nautical disaster in 1628] had a voyage of triumph compared to this. (Singing: “As long as the ship sails, as long as the heart beats, as long as the sun glimmers in the water …”) How could it end like this? Here I lay, looking at what was once mine. Danish bastards! This is what you have done to me!”

Another Danskjävlar! monologue

“With plutonium, we force the Dane to his knees …

Here … Denmark … shitted out of lime and water …

And over there … Sweden, hewn from granite …

Danish bastards!”

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