Denmark
2012 Article IV Consultation
Author:
International Monetary Fund. European Dept.
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Publication Date:
24 Jan 2013
eISBN:
9781475529036
Language:
English
Keywords:
ISCR; CR; rate; authority; fund; policy; return on equity; book value; trade partner; potential GDP; property market collapse; Global
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The global financial crisis hit Denmark hard, and the recovery has been slow and unsteady. Denmark’s slow growth predates the recent economic crisis, and the economy has underperformed its regional peers. The current account remains in surplus, largely reflecting weak domestic demand since the crisis and strong net income. Monetary policy is based on maintaining a tight peg to the euro. Denmark’s financial system has rebuilt capital but still has substantial vulnerabilities. Potential growth is expected to recover gradually.

Abstract

The global financial crisis hit Denmark hard, and the recovery has been slow and unsteady. Denmark’s slow growth predates the recent economic crisis, and the economy has underperformed its regional peers. The current account remains in surplus, largely reflecting weak domestic demand since the crisis and strong net income. Monetary policy is based on maintaining a tight peg to the euro. Denmark’s financial system has rebuilt capital but still has substantial vulnerabilities. Potential growth is expected to recover gradually.

Introduction

1. A new center-left government took office in October 2011, but economic policy is little changed. There is a broad political consensus on maintaining the peg to the euro and sticking to the fiscal targets needed to meet Denmark’s Excessive Deficit Procedure (EDP) commitments to the EU. The new government also approved a pension reform with a phased increase in the retirement age that had been negotiated by its predecessor.

2. Despite a faltering recovery, growth is expected to resume and gain momentum in 2013. Output has fallen in three of the most recent five quarters, GDP remains well below pre-crisis levels, and headline inflation remains under 3 percent. However, output returned to slight positive growth in 2012 Q3.

3. Fiscal policy has been supportive in the downturn and the recovery. The authorities have allowed the large automatic stabilizers to operate fully and supplemented them by discretionary fiscal policy actions as the recovery began to falter in late 2011.

4. The exchange rate peg to the euro guides monetary policy. Monetary policy has faced a significant challenge in defending the peg with large inflows seeking a financial safe haven in Denmark. Interest rate reductions by Danmarks Nationalbank (DN) culminated in a negative interest rate on marginal reserve deposits with the central bank in July 2012. This had the desired effect thus far, of discouraging further inflows and reducing the pressure on the DN to purchase foreign exchange reserves.

5. Risks are substantial and clearly tilted to the downside. Further slowdown or renewed recession in major trade partners, especially in the euro area, could weigh heavily on Danish exports. Renewed financial turmoil could raise funding costs for banks reliant on wholesale funding; a further decline in housing prices could put pressure on banks and households and depress still-weak private consumption.

6. Nevertheless, Denmark is well-positioned to address its macroeconomic policy challenges. Gross public debt is about 50 percent of GDP and partially offset by substantial government deposits at the DN, the current account surplus is about 5 percent of GDP, and its triple-A credit rating supports market access on favorable terms.

Recent Economic Developments and Outlook

A. The Economic and Financial Context

7. The global financial crisis hit Denmark hard, and the recovery has been slow and unsteady. Output fell by nearly six percent in 2009 and recovered only about one third of this loss by mid-2012. Output has fallen in three of the five quarters through 2012 Q3.

8. Denmark’s slow growth predates the recent economic crisis, and the economy has underperformed its regional peers during the past two decades. Despite a sound macroeconomic framework, a highly-skilled labor force, high participation rates, and an improvement in the terms of trade over the past decade, productivity growth has been sluggish and average income growth has been less than in other northern European countries. Over the same period, wage increases have been high relative to European peers and productivity growth has been slow, leading to a large increase in unit labor costs (Figure 5 and Selected Issues, Chapter 3).

9. The 2012 budget deficit is expected to widen to 4.2 percent of GDP from 2.0 percent in 2011, reflecting one-off stimulus measures, repayment of early retirement contributions and slower than expected growth. The stimulus measures included an acceleration of capital spending into 2012 and 2013, “balanced budget” stimulus through off-budget public enterprise infrastructure to be funded by higher prices and tariffs, and various other budgetary measures (Box 1). The authorities have also introduced a ceiling on public spending at the national, regional and municipal levels from 2014 to address longstanding problems of controlling spending at sub-national levels (Box 2) and a tax policy reform to foster employment and output growth.

10. The current account remains in surplus, largely reflecting weak domestic demand since the crisis and strong net income. Denmark’s current account remains positive at around 5 percent of GDP thanks to an upward trend in service exports and net income flows reflecting a strong net international investment position (Table 5). Capital inflows have been concentrated in portfolio investment, offsetting large but falling outflows of FDI and other investments. International reserves have more than doubled since end-2008, and inflows continued into the first half of 2012.

11. Monetary policy is based on maintaining a tight peg to the euro. Safe-haven inflows over the last year have pushed short-term Treasury bill yields to negative levels since late 2011. The continuing inflows and upward pressure on the exchange rate led the central bank to a series of interest rate reductions culminating in July 2012 with a shift to a negative interest rate (-0.2 percent) on banks’ marginal reserves with the central bank. Together with actions taken by the ECB at around the same time, this seems to have had the desired effect of discouraging the safe-haven inflows that have led to the substantial reserve buildup. Some of the costs and benefits of these safe-haven inflows are examined in Chapter 2 of the Selected Issues paper.

12. The exchange rate valuation appears broadly appropriate. Evidence from specific indicators is mixed. The macro balance and external sustainability approaches under the External Balance Assessment (EBA) point to a moderate currency undervaluation, based on a calculation that Denmark’s current account position is stronger than its estimated norm; by contrast, the real equilibrium exchange rate results point to a moderate currency overvaluation (with a correspondingly opposite view on the current account balance). Despite upward pressures from the onset of the European debt crisis, the krone has been maintained within a narrow band of half a percentage point or less relative to the euro in nominal terms.

Staff’s External Balance Assessment

article image

In percent. Figures indicate deviations from the cyclically-adjusted current-account to GDP ratio (in percent) from their estimated norm.

The range captures differences in the cyclically adjusted current account and the current account norm in the EBA estimates.

13. Households and corporates are still in the process of repairing their balance sheets. Household savings rates have risen following the bursting of a housing price bubble and the consequent decline in household net wealth (Box 3). While household net wealth is strong, gross household debt was 315 percent of disposable income in 2012 Q2, many households are net debtors, and most household assets are in the form of illiquid pension balances and real estate. The stock market rebounded to pre-crisis levels in the first half of 2012. Corporate leverage ratios have fallen with reduced borrowing from banks and increases in retained earnings.

14. Denmark’s financial system has rebuilt capital but still has substantial vulnerabilities. Banking system assets are roughly 400 percent of GDP. Profitability and asset quality are lower than in northern and central European peer countries. Loan-to-deposit ratio and reliance on wholesale funding are high. Loan impairments are rising, especially among small- and medium-sized banks (Table 6). Chapters 3 of the Selected Issues paper assesses recent reforms and the scope for further action, and Chapter 4 considers the potential contingent liabilities to the government that are implied by current spreads and bank equity prices.

B. Outlook and Risks

15. Staff projects 2013 growth at 0.9 percent of GDP, lifted mostly by private consumption and moderate business investment growth. This is broadly in line with third party forecasts but somewhat below the authorities’ projections. Inflation is expected to remain below 3 percent throughout the projection period thanks to a slowly-closing output gap (Table 2).

16. Potential growth is expected to recover gradually to nearly 1½ percent over the medium-term. Staff estimates that the combined effect of the fallout of Denmark’s property market collapse and the global financial crisis shaved ½ percentage points from the trend level of Denmark’s GDP. The upward trend in potential growth over the medium term largely reflects the expected recovery in investment spending. Staff’s estimates and projections imply an output gap of about 2.1 percent in 2012 that would largely close by 2017 as confidence is only gradually restored and credit conditions return to more normal levels.

17. Most risks to growth are tilted to the downside. A weaker outlook in Europe and worsening global financial conditions pose the largest downside external risks; a 1 percentage point drop in EU growth would reduce Denmark’s growth by about 1 percentage point. External assets are dominated by claims on core euro area and the Nordic-Baltic region, both of which are vulnerable to tail risks in the euro area. The banking system is exposed to liquidity shocks in global financial markets due to its high reliance on wholesale funding. Negative interest rates on banks’ marginal deposits with the DN could hurt bank profitability and induce disintermediation if maintained over the longer run. A sudden reversal of safe-haven capital flows to Denmark could require monetary tightening, which would hurt the recovery and make private sector deleveraging more difficult.

18. Stretched household balance sheets and domestic demand are the main domestic risks. A further decline in housing prices could have sizeable spillovers to the rest of the economy (Box 4).1 Acceleration of bank deleveraging could also pose risks if write-downs in the Danish banking sector are higher than implied by current NPL ratios and banks reduce domestic lending to meet capital requirements.

The Authorities’ Views

19. The authorities largely agree on the nature and direction of the risks. However, they do not see as much risk from household debt levels as staff, and note that households with higher debt also tend to be those with higher and more stable income.

Denmark: Risk Assessment Matrix1

article image
Note: L, M, H denote low, medium and high.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

Policy Discussions

20. Discussions focused on four areas:

  • Balancing fiscal consolidation with the use of near-term fiscal policies to support of the recovery;

  • Managing the domestic impact of international capital flows resulting from the peg to the euro;

  • Further adapting micro- and macro-prudential policies to existing risks and the evolving EU regulatory framework; and

  • Continuing measures to increase private and public sector productivity to foster longer-term growth.

A. Fiscal Policy

21. Medium-term consolidation plans are appropriate, but the authorities should stand ready to take additional action to support the economy and consider a less rapid adjustment if growth falls significantly below current projections. There is a risk that the consolidation could undercut the still weak economy, particularly if it is compounded by a repeat of under-spending by municipal governments or slower-than expected implementation of investment projects. As in the past, automatic stabilizers should be allowed to operate fully. Should additional fiscal support for the economy be needed, tax measures should be considered, in particular those that further reduce the tax wedge on labor income or increase incentives for work. On the other hand, further tax incentives for housing would be less desirable given the tax preferences for housing already in place. Further acceleration of public investment seems less promising given that public investment projects are slow to implement and the pool of good candidates for investment has been depleted by the earlier stimulus. However, the authorities should be prepared to take actions within the space under current EU limits if conditions dictate.

22. The authorities’ medium- and long-term fiscal plans set out a prudent and strong fiscal path through 2020 provided productivity growth can be strengthened. The authorities have relatively detailed fiscal plans through 2020 and less detailed scenarios that capture the implications of trends such as demographic shifts through 2100. However, the projections would benefit from additional sensitivity analysis that could take into account a divergence between growth in real wages, spending, and productivity. In particular, the assumption of an above-trend productivity growth rate might be revisited or contingency measures could be considered in the event that the assumed increase in productivity growth does not materialize in the 2012–20 period. Staff acknowledge that specific measures to be implemented beyond 2020 would best be developed in subsequent plans; however, more sensitivity analysis in the government’s very long-term scenarios could better inform those future decisions.

The Authorities’ Views

23. The authorities agree on the possible downside risks, but they stress that they attach a very high priority to meeting their 2013 targets under the EDP and exiting from it in early 2014. In addition to complying with their EU agreements, the authorities believe that failing to meet the targets would undermine financial market confidence in Denmark’s continued willingness to take the measures necessary to maintain fiscal sustainability. They observed that tax-based stimulus measures would be likely to have relatively low multipliers but agreed that it would be difficult to identify and implement additional good-quality capital projects. They did not plan any phase-out of existing tax preferences for housing over the medium term.

B. Monetary and Exchange Rate Policy

24. The longstanding peg to the euro has served Denmark well in anchoring inflation and minimizing exchange rate volatility vis-à-vis major trade partners. Recent safe-haven inflows have complicated the management of monetary policy in support of the exchange rate peg. The authorities’ interest rate reductions, including the move to a negative policy rate, have been successful thus far in containing these inflows and reducing the pressure to accumulate reserves. However, the impact of negative rates on bank profitability and lending should be kept under review, particularly if the rate is set at a still lower level. The benefits and potential risks from negative interest rates and possible means of mitigating the impact on bank profitability by targeting the negative rates at large depositors are discussed in Chapter 2 of the Selected Issues paper.

The Authorities’ Views

25. The authorities strongly reiterated their commitment to the peg to the euro, and noted that they would take whatever actions were needed in terms of interest rate measures and foreign exchange market interventions to defend it. On the negative interest rate, they agree that this is an unusual move, but they observed that the shift from a zero to a negative policy rate implies a cost to banks of only 0.02 percent of GDP for a banking system with assets of roughly 400 percent of GDP, and that such a shift in policy rates had no more adverse impact on bank earnings than a 20 basis point reduction between two positive policy rates. On the level of reserves, they noted that their commitment to the peg required them to adjust reserves and interest rates to market conditions; thus they saw no scope for a target level of reserves under the current monetary framework.

C. Financial Sector Policy

26. The staff noted the progress made in strengthening the banking sector and reducing banks’ dependency on state guarantees. Three-year loans to banks are helping to replace expiring state guarantees, prudential regulations have been strengthened through the “supervisory diamond” indicators, and the activation of the new resolution procedures applying haircuts to senior bank debt has reduced the perception of an implicit government guarantee on banks. However, bank profits remain weak and estimated default probabilities have risen (Figures 8 and 9). Also, capital buffers may not be as robust as regulatory measures indicate and risk weights may understate actual risk (see Selected Issues, Chapter 4) and market prices for bank equity and credit default swaps imply significant potential fiscal risk from the banking sector (see Selected Issues, Chapter 5). In this context, the authorities should continue to monitor bank performance and funding costs closely.

27. The staff welcomed the planned creation of the interagency Systemic Risk Council to be charged with making recommendations on macroprudential policy. The Council and the entities responsible for implementing its recommendations (e.g., the economic ministries and the Financial Supervisory Authority) should have clear roles and responsibilities, consistent with their institutional mandates, and information-sharing and coordination arrangements.

28. The creation of an interagency committee to develop prudential arrangements for systemically-important financial institutions (SIFIs) is also a positive step. This could keep Denmark at the forefront of bank resolution regimes in the EU. The potential inclusion of a bail-in framework would be appropriate, but reducing the risk posed by large institutions will take time, and the pace of implementation of higher capital requirements will need to take into account the possible contractionary impact of deleveraging.

29. The staff recommended using any flexibility embedded in EU regulations to design strong macroprudential and micro-prudential policies, treating Basel III and the CRD IV regulations as floors. Banks have made progress in shoring up regulatory capital ratios, but they should continue to retain earnings, raise new equity, and improve capital ratios through an orderly deleveraging. Large banks might also be required to report capital and risk-weighted assets on the Basel III definitions in addition to the current regulatory definitions to demonstrate their ability to meet more stringent future requirements.

30. The staff also suggested measures to strengthen crisis prevention. The strengthening of ex ante deposit insurance has been an important step, but risk-based deposit insurance premiums could further encourage sound risk management and discourage risky behavior. Also, deferred-amortization mortgage loans should be limited for macro-prudential reasons and the decoupling of taxes from real-estate values should be reconsidered as both appear to have contributed to excessive volatility in housing markets.

31. Finally, the mission welcomed the authorities’ openness to the creation of a banking union in Europe. By enhancing stability, a well-functioning euro area banking union would generate positive spillovers to other EU members, and especially to Denmark with its tight financial links with the euro area and peg to the euro. A well-functioning banking union would also enhance the EU single market for financial services benefiting the Danish banking system over the medium term, including through improved coordination of supervision. However, the mission team recognized the authorities’ legitimate concerns about having material representation on supervisory issues, on which steps are being considered to strengthen the governance of the European Banking Authority and enhance the voice of those that opt in within the ECB. The mission also recognized the authorities’ views that a resolution mechanism and deposit insurance are critical for a well-functioning banking union. Pending a clear road map and timetable on these matters, the team urged the authorities to continue supporting the process of developing the banking union.

The Authorities’ Views

32. The authorities agreed in principle with the staff on financial sector reform, but emphasized the need for a level playing field among banks from different countries. On risk-based deposit insurance, they noted that they would wait to see the forthcoming EU regulations before taking action. Similarly, on treating the CRD IV standards as a floor, they would need to be guided by the final form of the CRD IV directive. Finally, they noted that the current draft of the Basel III regulations would have a severe impact on Danish financial markets through its preferential treatment of government securities relative to covered bonds, regardless of the potentially better liquidity and risk profile of the latter. Denmark has a large covered bond market but a small government bond market, reflecting the important role of Danish mortgage banks, which provide approximately two-thirds of total credit to Danish borrowers and are almost fully funded through covered bonds. They hope that this would be revised in future versions of the Basel III regulations.

33. On the proposed banking union, they largely agreed with staff and emphasized the importance of having an effective voice within the supervisory framework. Moreover, they expressed the concern that a resolution and deposit insurance mechanism could be applied in other countries to place a smaller burden on bank creditors and a correspondingly larger burden on the public sector, which would be shared across members of the union to the disadvantage of Danish taxpayers.

D. Productivity and Competitiveness

34. The mission was encouraged by the authorities’ actions to address the challenges of improving competitiveness and productivity growth. In the private sector, Denmark’s overall business environment is judged to be among the best in the world in international rankings. Further, the package of competition reforms announced on October 26 addresses many of the known impediments to competition in specific sectors (e.g., reducing barriers to competition in construction and pharmacies, although not restrictions on large retail stores, and measures to make public procurement more transparent and competitive). In the public sector, several measures taken in recent years to reduce the tax wedge on labor income have increased incentives for work and human capital accumulation. Also, the new system of sanctions for overspending by municipal governments has contained unplanned expansion of public spending thus far, and this should help to limit crowding out of the private sector. The work of Statistics Denmark on efficiency of public spending may provide the basis for further reforms in specific areas. (Chapter 1 of the Selected Issues paper compares expenditures with social outcome in health, education, and other areas to those in other OECD countries to identify areas for possible efficiency gains.) The report of the Productivity Commission expected in late 2013 could set out a roadmap for productivity-enhancing reforms to improve unit labor costs and competitiveness more generally.

Staff Appraisal

35. Despite a faltering recovery, growth is expected to resume and gain momentum in 2013. Nevertheless, Denmark is well-positioned to address its macroeconomic policy challenges with its low public debt and strong credit rating.

36. To support the recovery, the authorities should stand ready to take additional action to support the economy and consider a less rapid fiscal adjustment if growth falls below current projections or sub-national government and investment spending falls below budgetary projections.

37. The longstanding and tight peg to the euro has served Denmark well in anchoring inflation and minimizing exchange rate volatility vis-à-vis major trade partners and remains appropriate.

38. The planned creation of an interagency council charged with making recommendations on macroprudential policy and the committee charged with identifying and proposing prudential arrangements for systemic institutions are both welcome. However, crisis prevention could be strengthened through risk-based deposit insurance premiums, limitations on deferred amortization mortgage loans, and a reversal of the decoupling of taxes from real-estate values to limit excess volatility in housing markets. The authorities should also use any flexibility in forthcoming EU directives on banking sector capital and liquidity to strengthen the resilience of the banking system, treating these directives as floors rather than targets where appropriate.

39. The authorities’ openness to the proposed EU banking union is welcome, and they should continue supporting the process of developing such a union in light of the potential benefits in terms of financial stability within the euro area. However, more work is needed on developing an effective voice within the supervisory mechanism for non-euro-area countries and on a resolution mechanism and deposit insurance that are critical for a well-functioning banking union.

40. The ongoing work of the Productivity Commission is welcome and the staff encourages it to lay out a set of productivity-enhancing reforms to improve unit labor costs and competitiveness throughout the Danish economy in the report planned for late 2013.

41. It is recommended that the next Article IV consultation with Denmark be held on the current 24-month consultation cycle.

Recent Fiscal Measures

In the past three years Danish governments have introduced policies to promote fiscal adjustment and long term sustainability, while, at the same time, supporting the economy.

Consolidation measures for 2011–13 in the 2009 “Spring Package” included higher energy taxes and a broader corporate tax base.

The 2010 Consolidation Agreement included a reduction in public consumption growth in 2011–13, a shortening of the unemployment benefit period from four to two years, and better controls on sub-national expenditures and taxes.

The 2011 retirement reforms increased the in the standard age for old-age pension from 65 to 67 over 2019–22 (previously schedules to take place over 2024–27), shortened the Voluntary Early Retirement Pension (VERP) scheme by increasing the early retirement age from 60 to 62 years over 2014–17 and further to 64 years by 2023 and allowed existing VERP contributors to exit and withdraw their contributions.

The authorities responded to the deterioration in the economic outlook for 2012 with a “Kick-start” package that frontloaded 1 percent of GDP in budgetary and public enterprise investment in 2012–13 that was originally planned for 2014–20, offsetting part of the cost by raising some excise taxes and abolishing some tax exemptions.

A June 2012 tax reform included: a gradual increase in the top tax bracket and an increase in the tax deduction for labor income from 2013 to 2022; an extra employment allowance for single parents from 2014; and an increased deduction for investment equipment through end-2013.

The Budget Act adopted in Spring 2012 and expected to be fully implemented in 2014 incorporates the Fiscal Compact’s structural balanced budget rule into national legislation, and introduces expenditure ceilings at the national and sub-national levels on a four-year rolling basis with the Danish Economic Councils in charge of assessing if the ceilings are respected. In the case of the central government, budget overruns in one year must be compensated by reducing expenditure in the following year so that the level of debt is not affected. Collectively, the retirement reform and the reforms in the Budget Act are expect to control spending in the near-term and reduce spending in the longer term by around 2 to 4 percent of GDP.

Municipal Government Spending Overruns: Policy Measures

After nearly two decades during which growth in public consumption almost always exceeded planned levels, often by large margins, a further tightening of the sanction mechanism for municipalities was enacted in 2010 in connection with the Fiscal Consolidation Agreement. This appears to have established effective control over such overspending for the first time in 2011. Municipalities account for almost half of public consumption expenditure, and they used to be responsible for a large share of total budget overruns.

In the period 2009–10, sanctions on municipalities for overruns relative to framework agreements led municipalities to budget their expenditure at lower level than the agreed frameworks. A further tightening of the sanction mechanism enacted in 2010—taking effect from 2011—extended the implementation of sanctions to overruns in the accounts relative to the agreed level of service expenditure (and not only budgets as previously). Sanctions are reductions in block grants to municipalities that apply both collectively and individually to municipalities.

A01bx02ufig01

Growth in public consumption

(Percent)

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Danmarks Nationalbank and Fund staff calculations.

How Vulnerable is Denmark’s Housing Market?

The Danish housing market continued its decline through 2011 and the first half of 2012, despite a short respite in 2010. Real house prices have fallen by 26 percent since their peak in 2007Q1, after a two-year period in which prices rose by over 60 percent. Housing starts declined by 17 percent in 2011, and by 28 percent in the first half of 2012 relative to the first six months of 2011. Year-on-year prices for the residential properties fell by 5–6 percent in 2012 Q2.

A01bx03ufig01

Real House Prices

(Index: 2005 = 100)

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: OECD and Fund staff calculations.

Indicators of house price misalignment are mixed. The price-to-income ratio and price-to-rent ratio remain above their 1970–2010 historical averages but by less than one standard deviation (0.7 and 0.9 respectively).

The housing market remains vulnerable. Mortgage loans with variable rates and deferred amortization loans (interest-only for 10 years) account for 74 and 56 percent of the mortgages respectively. Given the high debt levels of Danish households, this creates a threat of higher delinquencies should rates rise or incomes fall.

A01bx03ufig02

Denmark & Advanced Economies: Previous versus Current Housing Cycles

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: OECD and Fund staff calculations.

Financial Sector Policy Initiatives

The authorities have launched a series of financial policy initiatives to bolster the banking system:

  • Introduced the “supervisory diamond”, which is to be phased in by end-2012 and sets limit values for banks in five special risk areas: large exposures, lending growth, a funding ratio, concentration on commercial property and liquidity ratios.

  • Expanded in 2011 the collateral basis to include the banks’ credit claims of good quality and introduced 6-month monetary policy loans offered monthly and offered banks the option of taking out loans with a three-year term based on DNB’s collateral base in March and September 2012.

  • Reformed the Deposit Insurance System in 2012 to be consistent with the revised EU Deposit Insurance Directive. In 2012, the Danish Parliament adopted a legislative amendment requiring that the bank department of the Guarantee Fund for Depositors and Investors to be funded via a fixed annual rate of 2.5 per thousand of the net deposits.

  • Established a resolution framework including bail-in for banking institutions through Bank rescue package 3.

  • Reform of macroprudential policy by proposing to set up a Systemic Risk Council, chaired by a Danmarks Nationalbank governor and consisting of representatives from Danmarks Nationalbank, the FSA, three economic ministries, and independent experts, to identify and address the build-up of systemic risk by recommending to competent authorities or government on a comply-or-explain basis. The Council is expected to begin operations in early 2013.

Set up a SIFI committee to clarify SIFI criteria, requirements, and crisis management framework. The committee is expected to issue its recommendations before the end of 2012.

Implementation of Past Fund Advice

The last Article IV consultation was concluded by the Executive Board in December 2010. Since then, action has been taken in several important areas covered by past Fund advice.

  • Fiscal policy: The authorities have embraced a credible consolidation strategy to reduce the general government deficit to below 3 percent of GDP in 2013, in line with past Fund advice. A combination of discretionary fiscal measures and freely-operating ample automatic stabilizers supported weaker-than-expected economic growth during 2010–12. The authorities have also stepped up reforms that addressed persistent overruns in local spending, including through a reinforcement of sanctions.

  • Financial sector: Progress has been made in reducing banks’ dependency on state guarantees; prudential regulations have been strengthened through implementation of the “supervisory diamond” indicators, and the activation of the new resolution procedures applying haircuts to senior bank debt has reduced the perception of an implicit government guarantee on banks.

  • Labor markets: Fund advice including steps towards phasing out early retirement schemes and reforming sickness and disability leave benefits was echoed by reforms undertaken by the authorities. The reform of the Voluntary Early Retirement Program (VERP) cut the maximum period to receive early retirement pensions in the VERP from five to three years. Also, the period of receiving unemployment benefits was reduced from four to two years and the required number of months in work to be eligible for unemployment benefits was increased.

  • Competitiveness: The Competition Authority has issued in October 2012 a package aimed at strengthening competition. Also, a Productivity Commission was set up in 2012 by the new government and its independent report is expected by the end of 2013.

Figure 1.
Figure 1.

Denmark’s Slowing Economy

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Haver Analytics, IMF World Economic Outlook, and Fund staff calculations.
Figure 2.
Figure 2.

Denmark: Household Balance Sheets and Consumption

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Haver Analytics, OECD, and Fund staff calculations.
Figure 3.
Figure 3.

Denmark: Credit Market Developments

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Danmarks Nationalbank, European Central Bank, Haver Analytics, Statistics Denmark, and Fund staff calculations.
Figure 4.
Figure 4.

Denmark: Labor Market Developments

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Haver Analytics, OECD, and Fund staff calculations.
Figure 5.
Figure 5.

Labor Productivity and Unit Labor Cost

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: OECD, Statistics Denmark, and Fund staff calculations.
Figure 6.
Figure 6.

Monetary Policy Developments

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Danmarks Nationalbank, European Central Bank, Haver Analytics, Statistics Denmark, and Fund staff calculations.
Figure 7.
Figure 7.

Denmark: Fiscal Developments in a European Perspective

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Denmark Ministry of Finance, Danmarks Nationalbank, ECOFIN, IMF World Economic Outlook, Statistics Denmark, and Fund staff calculations.
Figure 8.
Figure 8.

Denmark: Banking System Indicators 1/

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources Danish Financial Supervisory Authority and Fund staff calculations.1/ Group 1 institutions include banks with total assets greater than DKK 50 billion. This includes: Danske, Jyske, Nordea, Nykredit, and Sydbank. Group 2 institutions include banks with total assets under DKK 50 billion.2/ The sum of large exposures is the sum of assets and off-balance-sheet items that, after a reduction for secured exposures, exceeds 10% of the combined core capital and supplementary capital.
Figure 9.
Figure 9.

Denmark: Developments in the Financial Sector

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Bloomberg, Danmarks Nationalbank, Moody’s KMV, Statistics Denmark, and Fund staff calculations.1/ Refers to Moodys KMV.2/ Average of RBS, HBOS, HSBC, UBS and Barclays.
Figure 10.
Figure 10.

External Developments

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: Haver Analytics and Fund staff calculations.
Table 1.

Denmark: Selected Economic and Social Indicators, 2009–17

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Sources: Danmarks Nationalbank, Eurostat, IMF World Economic Outlook, Statistics Denmark, World Bank WDI, and Fund staff calculations.

Contribution to GDP growth.

Overall balance net of interest.

Table 2.

Denmark: Medium-term Scenario, 2009–17

(Percentage change, unless otherwise indicated)

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Sources: Danmarks Nationalbank, Statistics Denmark, and Fund staff calculations.

Contributions to growth.

In percent of GDP.

In percent of potential GDP.

Table 3.

Denmark: Public Finances, 2009–17

(in percent of GDP)

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Sources: Statistics Denmark and Fund staff calculations.

Overall balance net of interest.

In percent of potential GDP.

Table 3a.

Denmark: Statement of General Government Operations, 2009–17

(Bil. Danish Kroner)

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Sources: Statistics Denmark and Fund staff calculations.

Discrepancy due to time difference in nonfinancial and financial data.

Overall balance net of interest.

In percent of potential GDP.

Table 3b:

Denmark: General Government Financial Balance Sheet, 2009–11

(In billions of Danish Kroner)

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Sources: Eurostat, Statistics Denmark, and Fund staff calculations.
Table 4.

Denmark: Balance of Payments, 2009–17

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Sources: National Bank of Denmark, Statistics Denmark, and Fund staff calculations.
Table 5.

Denmark: Net International Investment Position, 2005–11

(percent of GDP)

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Sources: International Financial Statistics and Fund staff calculations.
Table 6.

Denmark: Financial Soundness Indicators, 2007–2012Q2

article image
Sources: Finanstilsynet and Fund staff calculations. Note: Group 1 banks are those with working capital of DKK 65 billion or higher; Group 2 banks have working capital between DKK 12 billion and DKK 65 billion.
A01ufig01

Denmark: Public Debt Sustainability: Bound Tests 1/ 2/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2013, 022; 10.5089/9781475529036.002.A001

Sources: International Monetary Fund, country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
1

A 10-percent house price correction would deduct by about 3 percent of GDP from household balance sheets and would imply a reduction in annual consumption of 0.5–0.9 percent of GDP based on a marginal propensity to consume from wealth of 0.03 to 0.06.

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Cover IMF Staff Country Reports
Denmark: 2012 Article IV Consultation
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2013: Issue 022
Publisher:
International Monetary Fund
ISBN:
9781475529036
ISSN:
1934-7685
Pages:
56
DOI:
https://doi.org/10.5089/9781475529036.002

Growth in public consumption

(Percent)

Real House Prices

(Index: 2005 = 100)

Denmark & Advanced Economies: Previous versus Current Housing Cycles
Figure 1.

Denmark’s Slowing Economy
Figure 2.

Denmark: Household Balance Sheets and Consumption
Figure 3.

Denmark: Credit Market Developments
Figure 4.

Denmark: Labor Market Developments
Figure 5.

Labor Productivity and Unit Labor Cost
Figure 6.

Monetary Policy Developments
Figure 7.

Denmark: Fiscal Developments in a European Perspective
Figure 8.

Denmark: Banking System Indicators 1/
Figure 9.

Denmark: Developments in the Financial Sector
Figure 10.

External Developments

Denmark: Public Debt Sustainability: Bound Tests 1/ 2/

(Public debt in percent of GDP)