danmarks nationalbank nationalbank monetary …monetary review 2nd quarter 2011 the small picture on...

D A N M A R K S

N A T I O N A L

B A N K 2 0 1 1

2011

Da

nm

ark

s Na

tion

alb

an

k

Mo

neta

ry R

evie

w11

Danmarks Nationalbank Havnegade 5 DK-1093 Copenhagen K

Telephone +45 33 63 63 63 Fax +45 33 63 71 25

www.nationalbanken.dk E-mail: [email protected]

Danmarks Nationalbank

Monetary Review 2nd Quarter Part 1

2

2

1

Kvo_mon_11_1 del.indd 1Kvo_mon_11_1 del.indd 1 03-03-2011 09:32:3303-03-2011 09:32:33

MONETARY REVIEW 2nd QUARTER 2011

The small picture on the front cover shows the "Banker's" clock, which was designed by

Arne Jacobsen for the Danmarks Nationalbank building.

Text may be copied from this publication provided that Danmarks Nationalbank is specifi-

cally stated as the source. Changes to or misrepresentation of the content are not permit-

ted.

The Monetary Review is available on Danmarks Nationalbank's website:

www.nationalbanken.dk under publications.

Managing Editor: Per Callesen

Editor: Peter Birch Sørensen

This edition closed for contributions on 10 June 2011.

The Monetary Review can be ordered from:

Danmarks Nationalbank,

Communications,

Havnegade 5,

DK-1093 Copenhagen K.

Telephone +45 33 63 70 00 (direct) or +45 33 63 63 63.

Inquiries: Monday-Friday 9.00 a.m.-4 p.m.

E-mail: [email protected]

Rosendahls - Schultz Grafisk A/S

ISSN 0011-6149

(Online) ISSN 1398-3865

Monetary Review 2nd Quarter 2011 - Part 1

Contents

Recent Economic and Monetary Trends ............................................. 1

THE DANISH AND INTERNATIONAL ECONOMY

The Effects of Monetary Policy in Denmark ....................................... 51

Peter Askjær Drejer, Statistics, Marianne Clausager Koch, Morten Hedegaard

Rasmussen, Morten Spange and Søren Vester Sørensen, Economics

Changes in monetary-policy interest rates have a potential impact on households

and firms via two channels, i.e. the interest-rate channel and the credit channel.

Part 2 of this Monetary Review analyses these channels. This article provides a

non-technical summary of the most important findings of the analysis. We find

that the pass-through from monetary-policy interest rates to bank retail rates is high, but there are indications that it has diminished in connection with the

financial crisis. According to the credit channel, a change in monetary-policy

interest rates may also influence the total supply of loans. The analysis does not

demonstrate that this channel plays an important role in Denmark. The

sensitivity of the Danish economy to fluctuations in interest rates has increased

considerably since the mid-1990s. This can be attributed mainly to higher

indebtedness and more widespread use of adjustable-rate loans for housing

finance. If monetary policy is "appropriate" relative to the business cycle, high

interest-rate sensitivity could be an advantage. But if changes in monetary-policy

interest rates are independent of the business cycle and are prompted by e.g. the

need to address speculative pressure on the krone, the effect may be procyclical.

International Commodity Prices: Cycle, Bubble or Level Shift? ........ 61 Niels Peter Hahnemann and Marianne Clausager Koch, Economics

Commodity prices showed a strong upward trend from the millennium rollover

until the 2008 financial crisis. A sudden price drop in the wake of the crisis has

been followed by a resurgence in commodity prices. This article places current

commodity-market developments in a historical perspective and discusses

whether the price increases of recent years are attributable to cyclical factors,

a speculation-driven bubble or a structurally-based increase in relative prices.

The main explanations for the recent price rises are the growing importance of

commodity-intensive emerging economies, especially China, in the world

economy since 2000 and the failure of oil production, in particular, to keep up

with this development.


Commodity Prices and Inflation in Denmark ..................................... 79 Morten Spange, Economics

Commodity prices have been fluctuating greatly in recent years. This article

explores the knock-on effect from commodity prices to consumer prices in a

Danish context. Higher commodity prices inevitably lead to higher consumer

prices. It is key that such increases do not trigger a sustained rise in inflation

through wage formation. Experience from the past decade indicates that

increases in commodity prices have only a temporary impact on inflation.

FINANCIAL CONDITIONS

The Money and Foreign-Exchange Markets during the Crisis .......... 89

Anders Jørgensen, Market Operations, Paul Lassenius Kramp, Carina Moselund

Jensen and Lars Risbjerg, Economics

The money market, including the market for interbank loans, played a central

role during the financial crisis. In the autumn of 2008, the money markets froze

and the Danish krone came under pressure as international investors withdrew

from minor currencies. This article provides a non-technical summary of analyses

in Part 2 of this Monetary Review, exploring why the Danish money and foreign-

exchange markets were hit during the crisis, the impacts and Danmarks

Nationalbank's measures in this respect. Danmarks Nationalbank established a

number of initiatives to support up the banks' liquidity positions in kroner, euro

and dollars. Empirical analyses show that, in general, the banks' liquidity

improved due to these measures. The krone remained stable during the crisis.

Still, the crisis demonstrated that in times of crisis, a large foreign-exchange

reserve is needed, and, in response, Danmarks Nationalbank has more than

doubled its foreign-exchange reserve relative to the pre-2008 crisis levels.

Settlement Times for Payments in Denmark ...................................... 99

Jesper Bakkegaard, Tommy Meng Gladov and Anders Mølgaard Pedersen,

Payment Systems

In Denmark, it takes at least one day to execute a payment, longer in connection

with weekends and public holidays, which is not contemporary. Other countries,

with which Denmark is often compared, have restructured their payment systems

in recent years and it is now possible to settle payments intraday in these

countries. A working group chaired by Danmarks Nationalbank will prepare a

basis for decision with specific measures to reduce settlement times for payments

in Denmark by year-end.


DOCUMENTATION The 50-Year History of the Monetary Review .................................... 109

Kim Abildgren, Economics

The first Monetary Review was issued in May 1962, so in 2011 the publication has

entered its 50th year. This article summarises the substantial changes of the

presentation and content of the Monetary Review over time. The Monetary

Review published by Danmarks Nationalbank today is considerably more

informative than its ancestor 50 years ago. This reflects a trend towards greater

transparency in monetary and exchange-rate policies that has characterised

central banks worldwide over the last couple of decades.

Speech by Governor Nils Bernstein at the Annual Meeting of the Danish Mortgage Banks' Federation, 30 March 2011 ....................... 115

Speech by Governor Nils Bernstein at the Annual Meeting of the Association of Danish Mortgage Banks, 27 April 2011 ..................... 123 Press Releases ....................................................................................... 129

Tables

Vol. L, No. 2


1

Recent Economic and Monetary Trends

SUMMARY

The upswing in the world economy is still characterised by substantial variation in developments across regions and countries. The emerging economies are moving ahead at a high pace. In some of these countries there are signs of overheating, with a resultant risk of a backlash if economic policy is not tightened in time. In the USA, the most recent data releases point to dampening of growth, while the Japanese econ-omy has been temporarily set back by the disaster in March. In Europe, countries such as Germany and Sweden are enjoying high growth rates, while growth in Greece, Ireland, Portugal and Spain is impeded by ex-tensive sovereign debt problems.

The recovery of the world economy together with supply-side disruptions has led to strong increases in commodity prices. As a result, consumer price inflation now exceeds the target in a number of coun-tries. But there is still considerable spare capacity in most advanced economies, which dampens core inflation. Against that background, monetary-policy interest rates are expected to rise only moderately from the current low level.

The high and rising government debt ratios entail a considerable need for fiscal consolidation in the advanced economies in the coming years. In the short term, government finances in Greece, Ireland and Portugal pose the greatest threat to economic and financial stability in Europe. Particularly the situation in Greece causes much uncertainty. At the global level, there are currently no signs of economic policy steps being taken that may prevent a return to the large current-account imbalances seen in the years just before the financial crisis.

After five quarters of growth, Denmark's gross domestic product, GDP, has contracted in the last two quarters, primarily reflecting a very cautious approach to private consumption and investment in the wake of the financial crisis. The private sector's savings surplus is now at the highest level seen since World War II. This situation is unlikely to continue for very long, so it is expected that the last six months' down-turn in the Danish economy will be followed by renewed growth as savings and investment gradually return to their normal levels. How soon this will happen cannot be said with certainty. The large savings surplus in the private sector means that there is substantial pent-up pur-


2

chasing power that can easily be converted into higher consumption and investment if a positive shift is seen in household and business expect-ations. In order to ensure sustained and sustainable growth, it is important that the increase in the supply of labour and production capacity can keep pace with the expected hike in private-sector demand. Fiscal policy should therefore remain prudent in the coming years. The need for fiscal consolidation also calls for prudent fiscal policy.

THE INTERNATIONAL ECONOMY AND THE FINANCIAL MARKETS

The international economic upswing continues, but the pace still differs considerably from country to country. The most recent data releases point to sustained high growth in Sweden and Germany, while there has been moderate growth in the USA, the UK and the rest of the euro area overall. In the advanced economies, the upswing has mainly been driven by manufacturing, e.g. via exports to emerging economies.

Nonetheless, uncertainty about the international economy has in-creased recently, mainly on account of renewed doubt about the sus-tainability of government debts in Greece, Ireland and Portugal, as well as a number of disappointing US data releases. The disaster in Japan and higher food and energy prices, driven by factors such as turmoil in the Middle East and North Africa, also contribute to un-certainty. All the same, most confidence indicators point to a con-tinued upswing in the economy. Recent developments in the Pur-chasing Managers' Indices, PMI, for both manufacturing and services indicate further economic growth in the USA and the euro area in the 2nd quarter, cf. Chart 1.

The expectations that the upswing will continue are also reflected in stock market developments, where prices are supported by generally positive earnings prospects for the corporate sector. Chart 2 shows indices for the uncertainty about stock market developments that is inherent in the price of stock options in the USA and the euro area. The various shocks to the world economy in 2011 have only briefly increased uncertainty in the markets, and the level of uncertainty is about the same as at the beginning of the year. This indicates that investor con-fidence in the upswing is relatively robust.

Long-term interest rates remain at a very low level, reflecting factors such as low monetary-policy interest rates and large liquidity supplies from central banks.

The low long-term interest rates also indicate that long-term inflation expectations are moderate as there is still considerable spare production capacity in the advanced economies.


3

DEVELOPMENT IN PMI FOR THE USA AND THE EURO AREA Chart 1

30

35

40

45

50

55

60

65

Euro area, manufacturing USA, manufacturing

Euro area, services USA, non-manufacturing

2008 2009 2010 2011

Index

Note: Source:

The Purchasing Managers' Index, PMI, is based on a questionnaire survey in which purchasing managers assess their firm's position relative to the previous month. A value of more/less than 50 indicates that the situation hasimproved/worsened compared with the previous month. Reuters EcoWin and Bloomberg.

MEASURES OF UNCERTAINTY IN THE STOCK MARKETS Chart 2

10

15

20

25

30

35

40

Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11

10

15

20

25

30

35

40

Volatility index USA, VIX Volatility index euro area, VSTOXX (right-hand axis)

Per cent Index

Disaster in Japan

Rumours of Greekdebt restructuringUSA on negative outlook by S&P

Growing turmoil in Libya

Concerns about Portugal and other heavily indebted euro area member states

Portugal applies for assistance

Disappointing US unemployment figures

Growth concerns and uncertainty about heavily indebted euro area member states

Note: Source:

The VIX index is the implied volatility on options based on the S&P 500 index, and the VSTOXX index is theequivalent measure for the EUROSTOXX 50 index. Implied volatility indicates the expected volatility (the expected relative fluctuations in equity prices). It is calculated on the basis of the prices of a number of call andput options. Call options give the buyer the right, but not the obligation, to buy an asset at a given price. Put options give the buyer the right, but not the obligation, to sell an asset at a given price. The value of an optionincreases with the investor's expectations of fluctuations in the price of the asset, as the probability that theoption can be realised at a gain increases. Hence, the implied volatility calculated on the basis of option prices isan expression of the expected fluctuations in stock indices. A high value of the VIX index therefore means thatS&P 500 is expected to fluctuate strongly over the next 30 days, entailing considerable risk for investors. Reuters EcoWin.


4

Expectations that monetary-policy interest rates will be raised more rapidly in the euro area than in the USA have contributed to a weak-ening of the dollar vis-à-vis the euro since the turn of the year, cf. Chart 3. These expectations have more than offset the negative impact on the euro of the turmoil in the peripheral euro area member states.

After the earthquake in Japan on 11 March 2011 there was a tendency for the Japanese yen to strengthen, reflecting expectations that Japanese insurance companies would repatriate overseas investments in order to pay out damages, as they did after the Kobe earthquake in the 1990s. The stronger yen was seen as unfavourable for the Japanese economy, so on 18 March 2011 the central banks of the G7 countries intervened in the foreign-exchange market, and the tendency for the yen to appreci-ate was halted.

In addition to the tragic human losses as a result of the earthquake, economic activity has been affected. Particularly the manufacturing sector has been hit due to damage to production facilities and shortage of electricity. Japan's industrial output fell by 15 per cent in March 2011, while GDP fell by 0.9 per cent in the 1st quarter. The disruptions may spread beyond Japan's borders through global supply chains in which Japanese companies play a significant role as sub-suppliers, especially in the electronics and automotive industries. Add to this the potential impact on consumer and business confidence. In the near term, recon-struction activities and economic policy stimuli introduced by the

EXCHANGE RATES Chart 3

75

80

85

90

95

100

105

110

115

120

125

Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011

Euro Pound Swiss franc Renminbi Yen

Currency unit per dollar, index 1 Jan 2010 = 100

Note: Source:

A fall indicates strengthening vis-à-vis the dollar. Reuters EcoWin.


5

Japanese authorities will partially make up for the decline in economic activity. In its most recent forecast, the OECD expects Japan's GDP to fall by 0.9 per cent in 2011.

The impact of the disaster in Japan is expected mainly to be limited to Japan itself and the neighbouring region. The European economies are not expected to be affected to a large extent. The growth estimates published by international organisations reflect expectations of sus-tained sound economic growth in the advanced economies overall, cf. Table 1.

Growth in the advanced economies in 2011 is not expected to be strong enough to close the considerable negative output gaps that have developed in the wake of the global economic and financial crisis, cf. Chart 4.

So far the upswing has not been sufficient to ensure an appreciable decline in unemployment in the euro area overall. In the USA, employ-ment is showing a pronounced lag relative to the normal pattern in an upswing, cf. Chart 5. The moderate fall in unemployment in the USA since the peak in 2009 is partly attributable to a cyclical fall in the labour force.

In the region around Denmark, growth was high in 2010, especially in Sweden and Germany. Growth in both these countries is also expected to be higher than in most other OECD countries in the coming years. This exemplifies how countries that had robust economies before the crisis and avoided overheating are now in a stronger position at the end of the crisis.

INTERNATIONAL ORGANISATIONS' FORECASTS OF GROWTH IN SELECTED COUNTRIES Table 1

2011 2012 Per cent

2010 EU1 OECD2 IMF3 EU1 OECD2 IMF3

USA ...................................... 2.9 2.6 2.6 2.8 2.7 3.1 2.9 Euro area ............................. 1.7 1.6 2.0 1.6 1.8 2.0 1.8 Germany ........................... 3.5 2.6 3.4 2.5 1.9 2.5 2.1 France ............................... 1.4 1.8 2.2 1.6 2.0 2.1 1.8 Italy ................................... 1.2 1.0 1.1 1.1 1.3 1.6 1.3 Spain ................................. -0.1 0.8 0.9 0.8 1.5 1.6 1.6 UK ........................................ 1.3 1.7 1.4 1.7 2.1 1.8 2.3 Sweden ................................ 5.3 4.2 4.5 3.8 2.5 3.1 3.5 Japan ................................... 4.0 0.5 -0.9 1.4 1.6 2.2 2.1 China ................................... 10.3 9.3 9.0 9.6 9.0 9.2 9.5 India ..................................... 9.6 8.0 8.5 8.2 8.2 8.6 7.8

1 European Commission's spring forecast, May 2011. 2 OECD, Economic Outlook, May 2011. 3 IMF, World Economic Outlook, April 2011.


6

A number of countries had considerable internal and external imbal-ances in the period leading up to the crisis, in many cases due to several years of excessive consumption growth and too accommodative fiscal policies. In some cases this development went hand in hand with over-

OUTPUT GAPS Chart 4

-10

-8

-6

-4

-2

0

2

4

2005 2006 2007 2008 2009 2010 2011

Euro area UK USA Japan Germany

Per cent of potential GDP

Source: IMF, World Economic Outlook, april 2011.

USA – CHANGES IN THE UNEMPLOYMENT RATE DURING VARIOUS RECESSIONS AND UPSWINGS Chart 5

-2

-1

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Q4 1973 Q3 1981 Q3 1990 Q1 2001 Q4 2007

Quarters after cyclical peak

Per cent of labour force

Source: OECD, Economic Outlook, No. 89.


7

heating of the housing market. As illustrated in Chart 6, countries that had built up considerable foreign debt before the crisis have experi-enced weaker development in overall output in the wake of the crisis.

Likewise, there is a clear tendency for countries where housing prices rose in the period 1995-2008 to have had lower growth in recent years. In addition, overheated housing markets have typically been accom-panied by banking crises, which traditionally exacerbates and prolongs a cyclical downturn1.

The emerging economies have experienced pronounced growth since the crisis bottomed out, and overheating pressures are beginning to appear in some places. In the longer term this could lead to a new backlash. In some of these economies, credit growth has been 25-30 per cent over the last year. The strong economic activity in the emerging economies is reflected in higher commodity prices, cf. Chart 7. These countries consume more energy per unit of GDP, but they still have low consumption of energy and food per capita compared with the ad-vanced economies. Hence, the rise in commodity prices is to some extent to be expected as a long-term trend2. The depreciation of the dollar vis-à-vis major currencies will also contribute to higher commodity prices in dollar terms. In addition, the political turmoil in North Africa and the

1 See e.g. Stijn Claessens et al., How do business cycles and financial cycles interact?, IMF Working

Paper, No. 88, April 2011. 2 For an elaboration, see the article by Niels Peter Hahnemann and Marianne Clausager Koch,

International commodity prices: cycle, bubble or level shift?, p. 61.

NET EXTERNAL ASSETS AND GDP GROWTH IN 2008-11 Chart 6

Luxembourg

SwedenUSA

Austria

Belgium Germany

NetherlandsFrance

FinlandUK

Spain

Japan

Denmark

Portugal

Italy

Greece

Ireland

-150

-100

-50

0

50

100

150

-14 -12 -10 -8 -6 -4 -2 0 2 4 6Real GDP growth, per cent, 2008-11

Net external assets, per cent of GDP 2007

Source: IMF.


8

Middle East has led to concerns about disruptions to oil supplies. The resultant fear of higher future oil prices has to some extent been re-flected in the current spot price.

The rising commodity prices have led to substantial increases in con-sumer prices, and in many advanced economies the rate of inflation now exceeds the target. Accelerating prices increase the risk of second-round effects on inflation, e.g. through demand for larger wage increases.1 Overall there is still considerable spare capacity in the advanced econ-omies, however, and core inflation is generally modest, but rising, cf. Chart 8.

All in all, growth prospects for the world economy have proved to be relatively robust to various shocks to the economy. The most recent forecasts from the international organisations factor in high commodity prices, but elements of uncertainty still entail an increased risk that economic growth will be disappointing. In the assessment of the OECD, a price increase of 10 dollars per barrel of crude oil will, in the short term, reduce GDP growth in the advanced economies by 0.2 percentage point2. Such negative effects may be amplified if higher commodity prices lead to second-round effects on inflation, making it necessary to tighten monetary policy at a faster rate.

1 The issue of inflation in the Danish economy is discussed in more detail in the article by Morten

Spange, Commodity prices and inflation in Denmark, p. 79. 2 OECD, Economic Outlook, May 2011, p. 1.

OIL PRICES AND OTHER COMMODITY PRICES Chart 7

0

100

200

300

400

500

600

700

Index, 2000 = 100

Crude oil, Brent quality Metals Food

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Reuters EcoWin.


9

Another considerable risk factor relates to the sovereign debt problems in parts of the euro area and their interaction with the continued vulnerability of the financial sector. In the USA, the property market still poses a significant risk that affects both the financial sector and house-hold balance sheets. So far, the disaster in Japan is expected to have only limited effects on the world economy overall, but nevertheless it remains a negative risk factor, partly via Japan's role in the production chain for important industries, partly via the possibility of negative impacts on consumer and investor confidence in the region.

On the other hand, growth may also turn out to be more positive than expected. The private sector's fixed investments dropped sharply during the crisis, and although they have begun to rise again, the increase does not fully reflect the improvement in corporate earnings and finances. The household savings surplus soared during the crisis. This could also contribute to higher growth in the short term if the households' propen-sity to save declines more than expected. Housing markets have begun to pick up in a number of countries. Combined with higher stock prices and a more firmly anchored upswing, this could provide a basis for a larger fall in the private savings surplus than factored in by the economic forecasts.

International economic policy Growth in the international economy has shifted from being driven by fiscal and monetary policy stimuli to being more self-sustained. It is

CORE INFLATION Chart 8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2005 2006 2007 2008 2009 2010 2011

USA Euro area

Per cent, year-on-year

Note: Source:

Core inflation is the change in consumer prices exclusive of unprocessed food and energy. Reuters EcoWin.


10

expected that private consumption and business investment will make larger contributions to growth in the coming years. Monetary-policy interest rates remain very low, in line with the still large negative output gaps and relatively modest core inflation. In the USA and Japan quanti-tative easing of monetary policy is taking place. As regards the USA, the QE2 programme expires at the end of the 2nd quarter, by which time the Federal Reserve will have purchased long-term Treasury bonds for a total of 600 billion dollars. The Federal Reserve has announced that repayments on its portfolio of these securities will be re-invested in Treasury bonds, but it has no plans for further bond purchases.

Normalisation of monetary-policy interest rates is expected to take place very gradually in the coming years, as the output gap slowly closes. Hence, monetary policy in the advanced economies will continue to sup-port the upswing in the next few years. Combined with price develop-ments, the accommodative monetary-policy conditions thus entail nega-tive real interest rates, cf. Chart 9.

The risk of e.g. negative market responses creates a need for fiscal consolidation in the advanced economies. In most European countries, consolidation has already begun in 2011. As Chart 10 shows, the large EU member states are planning adjustments to public finances that will help to stabilise government debt in the period until 2015. The USA and Japan are facing serious challenges in terms of achieving fiscal sustainability.

REAL INTEREST RATES IN THE USA, THE EURO AREA AND THE UK Chart 9

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

USA Euro area UK

Per cent

Note: Source:

The real interest rate is measured by a 3-month Libor reference interest rate less the current rate of consumer price inflation. Reuters EcoWin.


11

So far the markets have responded fairly calmly to the lack of fiscal sus-tainability in the USA and Japan, but it is important to begin to con-solidate before higher interest rates increase the challenge. Uncertainty about fiscal sustainability can lead to sudden and pronounced changes in market interest rates and exchange rates. This was exemplified by the market response to Standard & Poor's warning of a potential down-grading of the US government debt, although the response was rela-tively short-lived. The magnitude of the US economy and its continued status as a "safe haven" do to some extent provide protection against such sudden market adjustments, while Japan benefits from the fact that its government debt is predominantly financed by Japanese in-vestors. To ensure stable growth in the world economy in the coming years, it is important that the USA adopts a credible plan for tackling its fiscal challenges.

In the short term, government finances in Greece, Ireland and Portugal pose the greatest threat to economic and financial stability in Europe. The high interest rates, cf. Chart 11, and CDS spreads on government debt in these countries show that the market imputes a considerable probability that it will be necessary for them to restructure their debts within the next five years. This applies especially to Greece.

REQUIRED FISCAL ADJUSTMENT IN ORDER TO STABILISE GOVERNMENT DEBT IN 2030 AT 60 PER CENT OF GDP Chart 10

0

2

4

6

8

10

12

14

Japan USA UK Spain France Italy Germany

Required adjustment Estimated adjustment 2010-15

Per cent of GDP

Note: Source:

The calculations show the required adjustment until 2020 that will be necessary in order to stabilise government debt in 2030 at 60 per cent of GDP (for Japan it is assumed that gross government debt is stabilised at 200 percent of GDP). IMF, World Economic Outlook, April 2011.


12

All three countries have concluded agreements with the International Monetary Fund, IMF, and the EU on bailout programmes to buy them time to make the necessary economic adjustments to reduce their debts to a sustainable level. In the cases of Ireland and Greece, fiscal consolida-tion takes place within the framework of the bailout programmes from 2010, while Portugal on 20 May 2011 obtained approval from the IMF's Executive Board for a joint programme with assistance from the IMF and the EU totalling 78 billion euro.

The large economic imbalances mean that Greece, Ireland and Portu-gal must introduce very extensive economic reforms in order to bring their economies back on track. Until now, Greece and Ireland have tightened fiscal policy significantly, by 5-8 per cent of GDP, but all three countries need to consolidate by a further 6-9 per cent of GDP in order to stabilise their debts.

The fiscal challenges are exacerbated by weak growth prospects and high levels of interest rates. The growth estimates for 2011 have regular-ly been adjusted downwards, cf. Chart 12, and the current market inter-est rates in Greece, Ireland and Portugal are significantly higher than en-visaged in the loan and stability programmes. The large debts, cf. Chart 13, and the high interest rates will increase the interest burden in the coming years.

Particularly in Greece the situation seems to be extremely difficult. Despite major fiscal adjustments, Greece has so far been unable to meet

YIELD SPREADS IN HEAVILY INDEBTED EURO AREA MEMBER STATES Chart 11

0

2

4

6

8

10

12

14

16

Percentage points

Spain Belgium Greece Ireland Italy Portugal

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Note: Source:

Yield spreads to Germany for government bonds with a maturity of 10 years. Reuters EcoWin.


13

the target for the government budget balance specified in the loan programme. Moreover, it has been difficult to implement the necessary structural reforms, especially in terms of collecting taxes and divesting government assets. With the current high levels of debt and interest

GROWTH ESTIMATES FOR 2010 AND 2011 OVER TIME Chart 12

-5

-4

-3

-2

-1

0

1

2

3

4

Q1 2010

Summer2010

Q1 2011

Q1 2010

Summer2010

Q1 2011

Q1 2010

Summer2010

Q1 2011

Greece Portugal Ireland

2010 2011

Percentage points

Source: IMF country reports and national ministries of finance.

GOVERNMENT DEBT AS A PERCENTAGE OF GDP – 1990-2015 Chart 13

0

20

40

60

80

100

120

140

160

180

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Greece Portugal Ireland Spain

Per cent of GDP

Note: Source:

Data for 2011-16 are IMF estimates. IMF, World Economic Outlook, April 2011.


14

rates, it will scarcely be possible for Greece to go to market in early 2012, as assumed in the programme. Yield spreads indicate considerable fears that Greece will be compelled to restructure its debt.

A write-down of Greece's debt would entail serious problems for Greece, as well as the risk of a knock-on effect on other countries. The Greek banks would suffer large losses, making it difficult for them to ensure their capital bases and liquidity. Such a step might also further increase risk premiums and postpone the date when the Greek govern-ment will be able to finance its debt on market terms. Besides the dire consequences to the Greek economy, realisation of losses on Greek gov-ernment securities might affect other debt-ridden countries by way of even wider yield spreads. Write-down of debt would also mean that investors in the rest of Europe incurred losses, with a resultant risk of financial problems. Finally, a write-down would affect both bilateral loans to Greece from other EU member states and the exposure of the European Central Bank, ECB, to Greek government bonds. The ECB has indicated that if the Greek debt is written down, Greek government bonds will no longer be eligible as collateral for monetary-policy loans from the ECB under its collateral rules.

In view of the acute difficulties for the Greek economy, the Greek government and representatives of the IMF, the European Commission and the ECB entered into a preliminary agreement in connection with the recent review of the Greek bailout programme. The agreement involves new fiscal and structural policy initiatives in Greece, as well as strengthened initiatives to privatise Greek government assets. Condi-tional upon these initiatives, the Greek government may receive supple-mentary loans from the European stabilisation mechanisms, EFSF and EFSM1. At the same time, the parties are discussing the option of en-couraging private-sector holders of Greek government bonds to accept that the maturity of the bonds is extended, or to re-invest repayments on existing debt in new Greek government bonds in order to reduce the need for funding via the EFSF and the EFSM.

Revision of the Greek bailout programme along these lines would have to be adopted by the Greek parliament, the Executive Board of the IMF and the EU member states in June or in early July 2011 at the latest.

The situation in Portugal and Ireland seems more manageable, but much will hinge on developments in growth, and in any case further fiscal adjustment will be required. Especially the weak growth prospects

1 The EFSF and the EFSM are the European Financial Stability Facility and the European Financial

Stability Mechanism. The EFSF aims to support euro area member states in difficulties on the basis of mandatory government guarantees and loans from euro area member states, and possibly also voluntary contributions from other EU member states. The EFSM is a mechanism for all EU member states for which the European Commission raises guaranteed capital within the EU's budget.


15

in Portugal could make it difficult to ensure sustainable public finances. The bailout programme includes a great many initiatives to strengthen the growth potential of the Portuguese economy, including labour mar-ket reforms and liberalisation of parts of the economy that have been subject to extensive government regulation until now.

Following the first review of the Irish bailout programme, the "troika" (the IMF, the Commission and the ECB) has concluded that Ireland is making good progress under the programme, but that it is still faced with major challenges in terms of ensuring fiscal consolidation and strengthening and reforming the financial sector.

In the emerging economies, the main challenge is to avoid over-heating. In many cases this will require tightening of macroeconomic policies. A number of Asian emerging economies have a particular need for more flexible exchange rates, tighter monetary policies and struc-tural reforms with a view to boosting domestic demand. A case in point is China, where growth has to a large extent been driven by infra-structure investments and exports. The Chinese authorities have begun to tighten monetary policy by increasing reserve requirements in re-sponse to rising prices and very strong credit growth. This may curb growth a little in the short term, but is necessary in order to avoid overheating, which would lead to a more serious decline in growth in the medium term.

The need for economic policy adjustments is reflected in the con-siderable current-account imbalances that still characterise the inter-national economy. Excessive imbalances lead to unsustainable accumu-lation of debt in the deficit countries. If the market suddenly loses con-fidence, debt crises and financial crises may arise, which could trigger an international economic downturn. It is important to adjust international economic policies so that a return to large global imbalances is avoided. Consequently, there is a need to increase savings in the deficit countries, notably the USA, via fiscal tightening. This must be combined with more flexible exchange-rate regimes in the Asian emerging economies and structural reforms to reduce the often very high private-sector savings surplus and boost domestic demand in these countries.

The higher oil prices could point to some current-account imbalances in the medium term. For the oil-producing countries, it would be expedient to save some of the temporary earnings that extraction of a limited resource constitutes. This will invariably lead to the build-up of current-account surpluses in oil-producing countries for a period. The latest forecasts from the international organisations indicate that this element of the global imbalances will gain importance in the coming years.


16

MONETARY AND EXCHANGE-RATE CONDITIONS

In recent months, the krone has been stable vis-à-vis the euro at a level very close to its central rate in ERM II. There was no noticeable impact on the exchange rate from the sale of Danisco as the players in the foreign-exchange market for kroner were able to absorb the resultant capital flows of around kr. 31 billion, cf. Box 1. From early March until end-May 2011, Danmarks Nationalbank sold foreign exchange for kr. 0.4 billion net related to intervention in the foreign-exchange market. In the same period, the foreign-exchange reserve increased by kr. 7 billion,

DUPONT'S ACQUISITION OF DANISCO AND THE EXCHANGE RATE OF THE KRONE Box 1

On 16 May 2011, the US enzyme company DuPont announced that 92.2 per cent of

Danisco's shareholders had accepted its purchase offer of kr. 700 per share. The

remaining minority shareholders will be squeezed out, and Danisco A/S is expected to

be delisted from the stock exchange on 17 June. The shareholders received the offer

from DuPont to purchase Danisco on 10 January 2011. Hence, it took 129 days from

the binding purchase offer was announced until the money (around kr. 31 billion)1

was received by the shareholders, cf. Chart 14.

TIMELINE FOR DUPONT'S ACQUISITION OF DANISCO Chart 14

Note: The purchase offer was extended twice due to lack of approval from the authorities before the purchase

offer of kr. 665 per share expired on 29 April.

When foreign investors buy Danish firms, this usually entails purchase and sale of

kroner for foreign exchange in the market. In the period up to a foreign acquisition

there is an increased demand for kroner for settlement of the purchase, and

consequently the krone tends to strengthen. Conversely, actual settlement of the

purchase may increase the supply of kroner, thereby weakening the krone, if the

previous owners choose not to re-invest the proceeds from the sale in Danish assets.

Shareholders receive purchase offer

from DuPont

The last day for shareholders to accept

the bid

The payment for the shares is transferred

from DuPont

Purchase offer expires. The same night DuPont raises its bid from

kr. 665 to kr. 700

DuPont announces that the deal has been accepted by 92.2 per cent

of the shareholders

10/01/11

29/01/11

13/05/11

16/05/11

19/05/11


17

CONTINUED Box 1

Normally the effect of an acquisition on the krone is of a size that can be managed by

the players in the foreign-exchange market for kroner without the need for Danmarks

Nationalbank to intervene or change its interest rates. But in a few cases very large

acquisitions have had such an impact on the exchange rate that Danmarks

Nationalbank has intervened and raised its interest rate, e.g. in 2006 in connection

with the sale of TDC.2

The Danisco transaction has had a limited market effect on the exchange rate of

the krone, cf. Chart 15. Danmarks Nationalbank has not intervened in connection with

the sale of Danisco. Neither the original offer, the enhanced offer nor the announce-

ment of the transaction had any appreciable impact on the krone.

The long process in connection with the sale of Danisco and the sometimes

negative Danish (collateralised) interest-rate spread to the euro area have pre-

vented the krone from appreciating after the announcement. And so far there has

not been any post-transaction effect on the krone after the payment of the

acquisition sum in kroner to the shareholders. Short-term money-market interest

rates have not been affected, but turnover in the day-to-day market has been

higher in connection with the sale. Hence, market participants have been able to

handle large transactions without any appreciable impact on the foreign-exchange

and money markets.

EXCHANGE RATE OF THE KRONE IN 2011 Chart 15

7.448

7.450

7.452

7.454

7.456

7.458

7.460

Kroner per euro

Jan Feb Mar Apr May

Note: Source:

The vertical lines indicate 10 January 2011 (when the shareholders received the purchase offer from DuPont), 29 April (when the purchase offer expired and DuPont raised its bid from kr. 665 to kr. 700), 13 May (the deadline for shareholders to accept the offer), 16 May (when DuPont announced the transaction) and 19 May (when payment for the shares was transferred to the shareholders). The most recent observation is from 31 May. Danmarks Nationalbank.

1 The sum has been calculated as number of outstanding shares * price in Danish kroner * fraction of shares = 47,693,295 * 700 * 0.922 = kr. 30.8 billion. Danisco's debt, etc should be added to the kr. 31 billion or so paid for the shares.

2 For a more detailed description of acquisitions and the exchange rate of the krone, see Danmarks Nationalbank, Monetary policy in Denmark, 2009, and Peter Jayaswal, Mette Kornvig and Katrine Skjærbæk, Private equity funds, capital flows and the foreign-exchange market, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2006.


18

to kr. 453.4 billion at end-May, primarily as a result of central govern-ment borrowing abroad. The government raises foreign loans in order to maintain an adequate foreign-exchange reserve. In principle, the gov-ernment issues debt denominated in foreign currency equivalent to the redemptions of the existing foreign debt. In 2011, such redemptions total 4.3 billion euro (kr. 32 billion).

With effect from 7 April, Danmarks Nationalbank raised the rate of interest on certificates of deposit and the current-account, lending and discount rates by 0.25 percentage point, to 0.95, 0.85, 1.30 and 1.00 per cent, respectively. This was a response to the ECB's announcement at its interest-rate meeting in early April that it would raise its main re-financing rate, marginal lending rate and deposit rate by 0.25 per-centage point. The ECB's decision was based on an assessment that euro area inflation may rise above the previously expected level. The ECB's raising of its interest rates was already discounted by the markets.

Liquidity conditions in the euro area are on the path of normalisation, and money-market interest rates in the euro area are approaching the ECB's key interest rate – the main refinancing rate, cf. Chart 16. Hence, the short-term money-market spread between Denmark and the euro area has narrowed. The 1-month spread between collateralised loans

EXCESS LIQUIDITY AND OVERNIGHT INTEREST RATE IN THE EURO AREA Chart 16

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Per cent

-300

-200

-100

0

100

200

300

400

500

600

Billion euro

Excess liquidity (right-hand axis)Overnight interest rate in the euro areaECB's deposit facility interest rateECB's main refinancing interest rate

2007 2008 2009 2010 2011

Note: Source:

Excess liquidity is the liquidity that exceeds the banks' liquidity requirements. The requirements are given by theECB's reserve requirements and the autonomous factors in the euro area such as banknotes in circulation and government deposits in the banks. Since mid-2008 the ECB has allocated liquidity at a fixed rate of interest in its main refinancing operations. 5-day moving averages for the overnight interest rate in the euro area (Eonia). Themost recent observations are from 8 June 2011. Reuters EcoWin and ECB.


19

(interest-rate swaps) has been negative for nearly all of the period since mid-January 2011. The uncollateralised interest-rate spread, measured as the difference between Cibor and Euribor, had narrowed to approxi-mately -0.09 per cent by early June, cf. Chart 17. To the extent that the higher market interest rates in the euro area lead to pressure on the krone, Danmarks Nationalbank will follow its usual practice, including raising its monetary-policy interest rates if necessary.

Developments in the credit markets and financial markets The yield on short-term mortgage bonds was 1.8 per cent at end-May, while the yield on long-term bonds was 5.1 per cent. Both have re-mained more or less unchanged since early March 2011, cf. Chart 18.

From the autumn of 2010, when the yield on a fixed-rate 30-year loan was close to 4 per cent, to the end of May 2011, the yield on long-term mortgage bonds has risen by approximately 1 percentage point, while the yield on short-term mortgage bonds has risen only by around 0.7 percentage point. In September 2010, adjustable-rate mortgages ac-counted for 36 per cent of gross new lending for owner-occupied dwellings, but by end-April 2011 this figure had risen to 59 per cent. There is a fairly close link between adjustable-rate mortgages as a share of gross new lending and the spread between long- and short-term

1-MONTH INTEREST-RATE SPREADS TO THE EURO AREA Chart 17

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11

Percentage points

Monetary-policy spread Collateralised lending Uncollateralised lending Note: Source:

The rate of interest on collateralised lending is based on a 1-month interest-rate swap with the overnight interest rate. The interest-rate spread for uncollateralised lending is the spread between 1-month Cibor and Euribor. The most recent observations are form 8 June 2011. Danmarks Nationalbank and Reuters EcoWin.


20

mortgage yields, cf. Chart 19. At end-April 2011, adjustable-rate mort-gages constituted 70 per cent of the total outstanding volume of mort-gage loans. Around 15 per cent of the variable-rate mortgages were loans with interest rate guarantee, i.e. the borrowers have protected themselves against large interest-rate hikes.

In March, auctions were held of bonds underlying adjustable-rate loans ("fixed bullets") with adjustment in April. The auctions went smoothly. With sales reaching kr. 114 billion for krone-denominated bonds, this was the largest March auction to date and the first time, Realkredit Danmark held a fixed bullet auction in March. Spreading these auctions over the year reduces the volume of adjustable-rate loans affected if an auction date coincides with a complete or partial market crash.

At end-April 2011, total deposits in Danish banks amounted to kr. 1,870 billion, corresponding to a decline of almost kr. 300 billion since the financial crisis erupted after the collapse of Lehman Brothers in September 2008. Primarily foreign MFIs1 have reduced their deposits, cf. Chart 20. The financial crisis showed that debt to other MFIs can be an unstable source of financing. There has been a tendency for foreign MFIs

1 MFI is an abbreviation of Monetary Financial Institution. In this context, MFIs comprise banks and

mortgage banks, other credit institutions and money-market funds.

YIELDS ON DANISH MORTGAGE BONDS Chart 18

0

1

2

3

4

5

6

7

8

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Per cent

Short-term mortgage bonds Long-term mortgage bonds Note: Source:

The 1-year yield on short-term mortgage bonds (fixed bullets) is a weekly average, with 8 June 2011 as the most recent observation. The long-term mortgage bond yield is an average effective yield on 30-year fixed-rate callable mortgage bonds, stated on a weekly basis with calendar week 23 as the most recent observation. Nordea Analytics and Association of Danish Mortgage Banks.


21

ADJUSTABLE-RATE MORTGAGES AS A PERCENTAGE OF GROSS NEW LENDING FOR OWNER-OCCUPIED DWELLINGS AND THE SPREAD BETWEEN SHORT- AND LONG-TERM YIELDS Chart 19

0

10

20

30

40

50

60

70

80

90

100

Per cent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Percentage points

Adjustable-rate mortgages as a percentage of new lending by mortgage banks

Spread between long- and short-term bond yields (right-hand axis)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

The most recent observation for gross new lending is from April 2011. The most recent observation for bondyields is from calendar week 23. Danmarks Nationalbank and Association of Danish Mortgage Banks..

DANISH BANKS' DEPOSITS BROKEN DOWN BY COUNTERPARTY COUNTRY AND SECTOR Chart 20

0

200

400

600

800

1,000

1,200

1,400

Kr. billion

Danish MFIs Foreign MFIs Danish non-MFIs Foreign non-MFIs

2003 2004 2005 2006 2007 2008 2009 2010 2011

Collapse of Lehman Brothers

Bank Rescue Package 1 adopted

Expiry of Bank Rescue Package 1

Amagerbanken transferred to the Financial Stability Company

Note: Source:

Deposits do not include deposits in foreign branches and subsidiaries of Danish banks or deposits in Danish banks from foreign branches and subsidiaries. Deposits from central banks are not included. The most recentobservations are from April 2011. Danmarks Nationalbank.


22

in particular to withdraw their deposits in Danish banks since the expiry of the general government guarantee on 30 September 2010. Danish banks have increasingly procured funding by issuing debt instruments rather than through debt to other MFIs. A more detailed analysis of the banks' funding during the crisis is presented in the article The money and foreign-exchange markets during the Crisis in Part 2 of this Monetary Review.

Bank deposits from households and non-financial corporations have traditionally been seen as a stable source of funding. Total deposits from non-MFIs have been more or less constant since the autumn of 2008. Since the expiry of the unlimited government guarantee covering all depositors and unsecured creditors comprised by Bank Rescue Package 1, and since the winding-up of Amagerbanken in February 2011, there has been a tendency for interest rates on the banks' term deposits to rise. In recent months, this has applied particularly to deposits with an agreed maturity of more than two years and deposits redeemable at notice from the corporate sector1. Since the beginning of 2008, the rates of interest on deposits with agreed maturity of small and medium-sized banks have been 0.5-0.9 percentage point higher than those of the large banks, cf. Chart 21. The same period has seen a shift of market shares in deposits from the small and medium-sized banks to the large banks.

On 19 May 2011, the credit rating agency Moody's announced that it would be downgrading seven Danish banks. Among the reasons given was that the use of the new winding-up scheme, Bank Rescue Package 3, in connection with Amagerbanken had prompted Moody's to reassess the probability of the Danish government stepping in to rescue an ailing bank without losses to creditors.

On 4 April 2011, Danmarks Nationalbank stopped collecting, calculat-ing and publishing Cibor, which is the reference rate at which a bank is willing to lend Danish kroner on an uncollateralised basis for up to one year to one of the most creditworthy institutions. This function was as-sumed by Nasdaq OMX, but the method of calculation remains the same. The reason was that lack of turnover behind the rates announced made it difficult for Danmarks Nationalbank to assess the Cibor rates quoted. Danmarks Nationalbank has established a working group in which Danmarks Nationalbank, the Danish Bankers Association, the Association of Danish Mortgage Banks and the Danish Mortgage Banks' Federation are represented. The group is to look into the possibilities of introducing a supplementary reference interest rate in the Danish

1 In volumes, deposits with agreed maturity constitute around 40 per cent of corporate deposits, while

deposits redeemable at notice constitute only around 1 per cent.


23

money market. Now that daily calculation of Cibor has been transferred to Nasdaq OMX, practice in Denmark resembles that of most other coun-tries, where reference interest rates are determined outside of the central bank.1

Credit developments Total lending by banks and mortgage banks to households and non-financial corporations has been more or less constant since the turn of the year. At the end of April, seasonally adjusted lending to households amounted to kr. 2,318 billion and lending to non-financial corporations to kr. 1,013 billion. Since the autumn of 2008, there has been a shift in lending to the corporate sector. Lending by banks has declined, while the mortgage banks have continued to see positive lending growth, cf. Chart 22. The shift from banks to mortgage banks reflects various fac-tors, including that firms which can pledge sufficient collateral are usually able to achieve a lower rate of interest when borrowing from mortgage banks. The banks' interest-rate margins were historically low in the boom years, but have subsequently increased. At the same time, some firms may find it attractive that, unlike bank loans, mortgage loans cannot be terminated by the financial institution. Furthermore, the shift

1 However, overnight reference rates such as Eonia and the T/N interest rate, which are based on

turnover-weighted data (actual trading), are normally determined by the central bank.

BANKS' INTEREST RATES ON DEPOSITS FROM NON-FINANCIAL CORPORATIONS Chart 21

0

1

2

3

4

5

6

Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Per cent

Large banks Medium-sized banks Note: Source:

Interest rates calculated on the basis of actual interest payments and average balances for outstanding business.The most recent observations are from April 2011. Danmarks Nationalbank.


24

may also be attributable to some banks having wished to release capital by encouraging their corporate customers to obtain mortgage loans rather than bank loans.

Broken down by industry, the figures show that especially the banks' lending to the manufacturing, real estate activities and transportation and storage sectors have driven the negative growth in lending to non-financial corporations in recent quarters, cf. Chart 23.

Part of the fall in bank lending to the corporate sector registered in the last six months is attributable to realised losses on loans, and in addition a few international banks represented in Denmark have moved lending to entities abroad.1 But a substantial part of the decline is a genuine reduction, which is relatively broadly distributed between the banks.

A large part of the reduction reflects lower demand for credit due to the cyclical downturn and consolidation in the private sector. To some extent, firms use their earnings to reduce their debts. Reduction of the firms' leverage ratio, which was fairly high in the period up to the financial crisis, will help to provide a more robust basis for a recovery. Lending to the corporate sector as a percentage of GDP remains high, despite recent years' decline in lending.

1 In the balance-sheet and flow statistics for the MFI sector, loans are stated in accordance with the

practice applied in the national accounts, i.e. including write-downs. Hence, impaired loans are not subtracted from total loans until they are actually realised as losses. The statistics include MFIs located in Denmark only. This means that transactions between foreign banks and their branches and subsidiaries in Denmark affect the statistics.

LENDING BY BANKS AND MORTGAGE BANKS TO NON-FINANCIAL CORPORATIONS Chart 22

200

250

300

350

400

450

500

550

600

650

Kr. billion

Banks Mortgage banks

2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Seasonally adjusted lending at the end of the month. The most recent observations are from April 2011. Danmarks Nationalbank.


25

At the same time, the banks' credit standards are, overall, still tighter now than in the period immediately before the financial crisis. A signifi-cant part of the tightening should be seen as a return to normal after the easy credit conditions in the pre-crisis period.

Some firms are more creditworthy than others. Among the banks, there is considerable competition to offer loans to firms with good earnings, especially large firms with substantial exports. These firms have access to credit on lenient interest-rate terms, and in some cases the interest-rate margins are identical to those seen during the boom. At the same time, interest-rate margins have widened for a group of firms with weaker earnings, including a group of small and domestically oriented firms.

If access to credit and interest rate fixing reflect the risks linked to the individual firm, the differences in credit conditions are a healthy sign and a prerequisite for an adjustment process that supports the develop-ment of sound firms and makes it more difficult for weak firms to sur-vive. This releases resources for new, more productive activities.

There are no indications that the banks' and mortgage banks' credit conditions are in general an impediment to production for sound firms.1

1 For example, financial restrictions have been given a very low weighting as an impediment to

production in Statistics Denmark's industrial confidence indicator in the post-crisis period. Insufficient demand plays a far greater role.

GROWTH IN LENDING BY BANKS TO SELECTED SECTORS Chart 23

-30

-25

-20

-15

-10

-5

0

5

10

Real estateactivities

Manufacturing Wholesale andretail trade

Agriculture,forestry, fishing,

etc.

Transportationand storage

Construction

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011


Note: Source:

Lending to the banking and finance sector and insurance companies accounted for 43.5 per cent of the totalportfolio of loans (not shown in the Chart). Lending for real estate activities accounted for 12.9 per cent of total loans, manufacturing 8.1 per cent, wholesale and retail trade 7.6 per cent, agriculture, forestry, fishing, etc. 6.1 per cent, transportation and storage 3.5 per cent and building and construction 2.7 per cent. Danmarks Nationalbank.


26

It is important to monitor developments closely in the coming period when the individual government guarantees issued under Bank Rescue Package 2 expire for the more than 40 banks concerned.1 Box 2 describes the development in the small and medium-sized banks' customer fund-ing gaps.

1 At 31 December 2010, 50 institutions had issued for a total of kr. 193 billion with individual

government guarantees, including issuance by mortgage banks and Faroese banks. During the 1st quarter of 2011, the outstanding volume declined by kr. 11 billion, primarily as a result of premature redemptions, of which kr. 3.75 billion was redeemed prematurely by the Financial Stability Company's own subsidiaries. The other premature redemptions were primarily made by small banks. See www.finansielstabilitet.dk and Danmarks Nationalbank, Financial stability, 2011 for a more detailed description.

CUSTOMER FUNDING GAPS OF SMALL AND MEDIUM-SIZED BANKS Box 2

The small and medium-sized banks (the Danish Financial Supervisory Authority's group

3 and 2 banks) have a net customer funding gap, defined as their total deposits less

their total lending. At the end of the 1st quarter, the net customer funding gap was

kr. 30 billion. This should be compared with a customer funding gap of more than kr.

100 billion in 2008.

Among the banks in groups 2 and 3, 44 had customer funding surpluses totalling kr.

33 billion at the end of the 1st quarter, while 39 banks had customer funding gaps

totalling kr. 63 billion.

Banks with customer funding gaps finance this gap via deposits from other credit

institutions or by issuing bonds or other debt instruments.

CUSTOMER FUNDING GAPS OF SMALL AND MEDIUM-SIZED BANKS Chart 24

-120

-100

-80

-60

-40

-20

0

20

40

Mar03

Sep03

Mar04

Sep04

Mar05

Sep05

Mar06

Sep06

Mar07

Sep07

Mar08

Sep08

Mar09

Sep09

Mar10

Sep10

Mar11

Kr. billion

Gross customer funding surplusGross customer funding gapNet customer funding gapNet customer funding gap, incl. deposits with individual government guarantees

Note: Source:

Lending before write-downs. Exclusive of banks transferred to the Financial Stability Company andexclusive of deposits from SPVs abroad. These relate to proceeds from debt issuance abroad with individualgovernment guarantees where several small banks have issued jointly through an SPV. Danmarks Nationalbank and the Financial Stability Company.


27

THE DANISH ECONOMY

Economic activity According to preliminary national accounts data, Denmark's GDP con-tracted by 0.5 per cent in the 1st quarter of 2011, cf. Chart 25, after having declined by 0.2 per cent in the 4th quarter of 2010. The down-turn follows five quarters of healthy growth. Nevertheless, since the economy bottomed out in the 2nd quarter of 2009, overall growth has been stronger than the underlying growth in production capacity. This has reduced spare capacity in the economy. Private consumption has also shown a positive trend since 2009, but fell by 0.8 per cent in the 1st quarter of 2011.

Disposable income rose substantially in 2009-10, reflecting factors such as income tax cuts and the low level of interest rates. But the rise in income was only to a limited extent used for higher private consump-tion. There is also a large savings surplus in the corporate sector. The reason is that profits have risen, but so far it has not been necessary to increase the capital stock much by way of new investment. In spite of the low interest rates, the private sectors' total savings surplus is there-fore at the highest level since World War II, cf. Chart 26.1 This is because consumers and firms have wished to consolidate after the crisis. The heightened economic uncertainty has encouraged high savings and restraint on investment.

In the 1st quarter, business investment dropped sharply, reflecting, among other things, a negative contribution from the export of a previously imported drilling platform. This is offset by a positive export contribution. Even without this extraordinary effect, business investment would have declined in the 1st quarter. Residential investment has, on the other hand, risen. Combined with growth in corporate earnings, the very low level of business investment gives reason to believe that invest-ment will pick up in the coming years.

All in all, the historically large private-sector savings surplus means that there is substantial pent-up purchasing power. It will therefore be possible to increase private-sector demand significantly in the coming years, despite the freeze on the progression thresholds in the income tax system, low wage increases and possibly rising interest rates.

Public consumption has been declining since the 3rd quarter of 2010 and fell by 0.8 per cent in the 1st quarter of 2011. In the preceding period, the public sector expanded strongly. The slowdown in public con-

1 The Chart shows the quarterly private-sector savings surplus back to 1971 only, but annualised data

constructed by Danmarks Nationalbank shows that the private-sector savings surplus is higher now than at any other time since 1944.


28

GROSS DOMESTIC PRODUCT AND PRIVATE CONSUMPTION IN VOLUMES Chart 25

95

100

105

110

115

120

125

Index, 2000 = 100

GDP Private consumption

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Quarterly data, seasonally adjusted. Chained values. The most recent observations are from the 1st quarter of2011. Statistics Denmark.

THE PRIVATE SECTOR'S SAVINGS SURPLUS Chart 26

-15

-10

-5

0

5

10

15

Per cent of GDP

1971 76 81 86 91 96 01 06 11

Note: Source:

The private sector's savings surplus is the difference between total private gross savings and total private grossinvestment, including residential investment. Statistics Denmark and own calculations.


29

sumption should be viewed in the light of the introduction in 2011 of tighter management of local government finances and more severe individual sanctions against local authorities that do not observe the consumption limits agreed between the Danish government and Local Government Denmark. Confidence indicators Regardless of the slowdown in the Danish economy in the winter months, confidence indicators have picked up somewhat. The composite confidence indicator for the service sector has risen quite a bit over the last year and is now on the positive side, cf. Chart 27. The indicator for the industrial sector also rose in May, to the highest level since 2007. Actual industrial production has, however, been flat since mid-2010. The very cyclically sensitive construction sector has been characterised by ex-tensive pessimism in the last few years. But expectations in this sector have risen significantly since the turn of the year, mainly reflecting sta-bilisation of employment expectations. In a longer-term perspective the current level of employment in the construction sector is not particularly low, and there will scarcely be a lasting need for an increase in employ-ment in this sector.

In May the number of compulsory liquidations was approximately 20 per cent lower than the monthly average for 2010, but viewed over a

CONFIDENCE INDICATORS Chart 27

-50

-40

-30

-20

-10

0

10

20

30

-25

-20

-15

-10

-5

0

5

10

15

Consumer expectations (right-hand axis) Industry Building and construction Services

Percentage balances Percentage balances

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Confidence indicators for industry, services and building and construction. The most recent observations are from May 2011. All indicators have been adjusted for seasonal fluctuations. Statistics Denmark.


30

longer horizon the number remains high. Employment is affected only to a limited extent as the firms that fold are mainly small ones.

Consumer confidence has been fairly stable over the last year at a level close to the long-term average, cf. Chart 27. Consumers expect both the Danish economy and their own family's finances to be better in a year than they are now. All the same, they perceive the Danish economy as worse today than one year ago. Adjusted for seasonal fluctuations, retail sales rose by 0.9 per cent in April relative to March.

The number of enforced sales, which rose in 2008 and 2009 due to the economic downturn, has declined marginally over the last year. The number is low when compared with previous recessions. Car sales have been at the same high level as in 2007-08 in recent months. One of the reasons could be that the strong downturn made households and firms postpone major investments until they were more certain about the economic outlook. Consequently, there has been a backlog, which is now being reduced. Since the turn of the year car sales have fallen. Some of the cars bought by the corporate sector are converted into private leasing of cars by households, so car sales to households do not fully reflect their demand for cars.

Foreign trade and balance of payments Imports of goods increased by 2.4 per cent in April, while exports were virtually unchanged relative to March, cf. Chart 28. Foreign trade has risen considerably since the trough in 2009. Nevertheless, manufactured exports have been unable to keep up with the economic upswing among Denmark's trading partners, so in volume terms Danish firms have lost market shares since 2009. Imports have developed more or less in line with exports over the last couple of years and hence the trade balance still shows a large surplus.

The current-account surplus for the last 12 months has been kr. 102.2 billion, compared with a surplus of kr. 69.6 billion in the preceding 12 months. The large surplus reflects factors such as income from sea freight and investment income. Furthermore, business investment, which traditionally has a large import content, is currently very low. Over the last year, the surplus on trade in goods has decreased moderately, while the surplus on trade in services has increased substantially. This is mainly attributable to rising income from sea freight as world trade has recovered.

Labour market Net unemployment has declined slightly since end-2009, to 102,800 in April, adjusted for seasonal fluctuations. This corresponds to 3.8 per cent


31

of the labour force, cf. Chart 29. Gross unemployment, which includes people in activation schemes, has also begun to fall since the turn of the year, and unemployment based on the random-sample labour-force survey, LFS, fell by 5,000 in the 1st quarter of 2011. This indicates that the labour market has ceased to weaken and that unemployment has peaked. Unlike the other definitions of unemployment, LFS unemployment includes e.g. the jobless without entitlement to public benefits and those in education who state that they would like to find employment. The latter's share of LFS unemployment in the 1st quarter of 2011 was 47,000 people. While net and gross unemployment are calculated on a full-time basis, people seeking part-time work are included in LFS unemployment with the same weight as those seeking full-time work.

According to the national accounts, employment (wage earners less those on leave of absence) fell by 400 in the 1st quarter. This masks an increase of 3,200 in private-sector employment and a decrease of 3,600 in public-sector employment. The number of new vacancies posted on the Internet is around 15,000 per month, with a slight increasing trend over the last year. By comparison, the level was more than twice as high towards the end of the most recent boom. The number of announced lay-offs fluctuates somewhat, but has declined substantially since 2008-09, to a level only a little higher than that seen in 2004-05.

EXPORTS AND IMPORTS OF GOODS Chart 28

25

30

35

40

45

50

55

60

-2

0

2

4

6

8

10

12

Surplus (right-hand axis) Exports Imports

Kr. billion Kr. billion

2005 2006 2007 2008 2009 2010 2011

Note: Source:

Exports and imports exclusive of ships, planes, etc. Monthly data at current prices. The most recent observations are from April 2011. Statistics Denmark.


32

It is believed that the supply side of the economy will be able to handle the rise in private-sector demand without appreciable increases in price and wage pressures, cf. Box 3. However, it should be borne in mind that wage inflation has been stronger in Denmark than in its major trading partners for some years, which has led to loss of competitiveness. This loss is not expected to be made up for.

The housing market Following the large drop during the crisis in 2008-09, real house prices seem to have stabilised, but are still being squeezed by a very large number of homes for sale. According to the supply statistics from the Association of Danish Mortgage Banks, a good 66,000 owner-occupied homes and summer cottages were for sale on the Internet in April, ad-justed for seasonal fluctuations. This is an increase of approximately 14 per cent on the preceding year. Moreover, the number of sales is signifi-cantly below the average for the last 20 years, and time on market is long.

Despite the large supply, nominal house prices rose moderately in 2010. From the 3rd to the 4th quarter of 2010, the prices of single-family and terraced houses rose by 0.8 per cent according to Statistics Denmark, while the prices of owner-occupied flats rose by 1.1 per cent. Both figures

UNEMPLOYMENT Chart 29

0

50

100

150

200

250

1,000 persons

0

50

100

150

200

250

1,000 persons

Net unemployment Gross unemployment LFS unemployment LFS-unemployed students

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Monthly data for net and gross unemployment and quarterly data for LFS unemployment. The most recent observations are from April 2011 for net and gross unemployment and from the 1st quarter of 2011 for LFSunemployment. Statistics Denmark.


33

THE CURRENT CAPACITY PRESSURE IN THE DANISH ECONOMY Box 3

In recent months, net unemployment has been just over 100,000 people, cf. Chart 30.

This is not much above the structural level of unemployment estimated to be

compatible with stable wage and price developments in the medium term. This raises

the issue of how close the Danish economy now is to its capacity limit and thus to

which extent there will be spare production capacity as demand picks up.

The spare capacity can be broken down by three factors. Firstly, there is the

unemployment gap, which describes how much unemployment deviates from the

structural level. Secondly, there is the labour force gap, which describes how much the

labour force deviates from the structural level. A negative unemployment gap and a

positive labour force gap are both indicators of high demand for labour. This will

result in higher wage increases, which will squeeze corporate profits, possibly leading

to higher inflation. Finally, capacity pressure depends on capacity utilisation in the

corporate sector. Lack of spare capacity will encourage firms to raise prices.

UNEMPLOYMENT AND LABOUR FORCE Chart 30

2,500

2,600

2,700

2,800

2,900

3,000

0

100

200

300

400

500

Unemployment (right-hand axis) Labour force Employment

1,000 persons 1,000 persons

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: Source:

The labour force is the sum of those in employment and net unemployment. Statistics Denmark.

Right now net unemployment is not much above the estimated structural level, so on

the basis of this measure of unemployment the unemployment gap is modest. Indeed,

the rise in unemployment since 2008 has been surprisingly moderate seen in relation to

the significant drop in output. However, the labour force has declined substantially in

the same period, cf. Chart 30. Moreover, the number of people of working age has

increased. This means that the participation rate, stated as the share of the 16-65-year

olds who are part of the labour force, has declined to 79.0 per cent, 1.6 percentage

points lower than in the 1st quarter of 2006. In the intervening period, the participation

rate was considerably higher as a result of a cyclical increase in the labour force.

Among other things, the decline in the labour force reflects that some 30,000

people have transferred to activation schemes from the 4th quarter of 2008 to the 3rd

quarter of 2010. These people are included in gross unemployment, but not in net un-


34

CONTINUED Box 3

ployment and hence not in the labour force. Among those who lost their jobs during

the downturn there is also a large group who are neither included in gross nor in net

unemployment. For example, 30,000 employees became jobseekers without receiving

public benefits, while another 30,000 went into education or training.1 Many of these

will presumably be ready to join the labour force when demand for labour increases.

Consequently, there is a considerable labour force gap at present.

If an increase in demand for labour is not to lead to wage pressure, the people

constituting the labour force gap must be ready to enter the labour market at

sufficiently short notice. This is presumably the case for most of those who have

transferred to unemployment without public benefits. And many of those in

education or training are likely to be interested in part- or full-time employment as

soon as job opportunities improve. Moreover, experience from 2006-08 shows that the

number of people in active labour market programmes can be reduced fairly rapidly

once the labour market begins to tighten. This means that a relatively large group of

people will be ready to step into the labour market as the need for labour increases.

During the most recent upswing there was also a certain influx of foreign labour. It is

essential that the supply of labour responds quickly to a cyclical upturn, as was the

case during the boom in 2006-08. This underscores the importance of keeping up

active labour market policies, even in periods when there is spare capacity.

The total capacity pressure also depends on capacity utilisation in the corporate

sector. According to the European Commission's sample-based indicator the capacity

utilisation of Danish firms has risen considerably since the trough during the crisis in

2009, but still remains well below the long-term average, cf. Chart 31. Statistics

Denmark's indicator of spare capacity shows a similar pattern. This suggests that, in the

short term, firms will be able to increase output with the existing production equipment.

CAPACITY UTILISATION IN THE CORPORATE SECTOR Chart 31

-20

-10

0

10

20

30

40

50

60

Percentage balances

60

65

70

75

80

85

90

95

100

Spare capacity Capacity utilisation (right-hand axis)

Percentage of full utilisation

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: Source:

The most recent observations are from the 4th quarter of 2010 for capacity utilisation and the 1st quarter of 2011 for spare capacity. Statistics Denmark and European Commission.


35

have been adjusted for seasonal fluctuations. Prices of houses and flats continue to rise more in the Copenhagen area than in the rest of Denmark.

As demonstrated in the Monetary Review, 1st Quarter 2011, Part 2, fluctuations in the housing market have substantially amplified the gen-eral cyclical fluctuations in recent years. Changing framework conditions in the housing market over the last decade have made house prices far more vulnerable to fluctuations in demand, cf. Box 4. Wage developments Private-sector wage inflation has declined as the pressure on the labour market has eased since the boom years. For members of the Confeder-ation of Danish Employers, DA, the annual rate of wage increase was 2.0 per cent in the 1st quarter of 2011, cf. Chart 33. By comparison, it was 2.5 per cent in the last three quarters of 2010. However, the 2010 figures overestimate wage growth by approximately 0.4 percentage point as a result of the introduction of multimedia tax and the transition to new codes for job functions. This means that according to DA, wage inflation has been virtually unchanged over the last year.

Public-sector wage inflation reached a very high level in 2008-09 due to the collective agreement concluded at the peak of the boom in early 2008, cf. Chart 33. Consequently, public-sector wages rose substantially more than those in the private sector for some time. Within the last year, wage developments in central, local and regional government have subsided considerably. Wages rose by 2.0 per cent in central government and by 1.7 per cent in local and regional government from the 1st quarter of 2010 to the 1st quarter of 2011. The strong decline in wage inflation reflects the regulatory mechanism whereby longer-term wage developments in the public sector are linked to those in the pri-vate sector. Due to the weaker wage developments in the private-sector labour market, public-sector wages have risen too fast in relative terms. As a result of the regulatory mechanism, this mismatch will be evened out via a period of low public-sector wage increases.

Industrial wage inflation in Denmark is now nearly in line with the level abroad, following a prolonged period of higher wage increases in Denmark than among its trading partners.

CONTINUED Box 3

Hence, the overall assessment is that the supply side of the economy will be able to accommodate the expected growth in private-sector demand over the next couple of years without this leading to increased price and wage pressures.

1 See Box 2 of Danmarks Nationalbank, Recent economic and monetary trends, Monetary Review, 4th Quarter 2010.


36

FLUCTUATIONS IN HOUSE PRICES AND FRAMEWORK CONDITIONS IN THE HOUSING MARKET Box 4

Over the last decade, the introduction of deferred-amortisation loans and the freeze

on nominal property value taxes have made the housing market considerably more

vulnerable to cyclical fluctuations.1 How much more unstable the housing market has

become can be illustrated by means of econometric models of the average house price

of single-family houses in Denmark. To this end, we estimate two alternative models.

In both models we assume that the underlying demand for housing depends on,

inter alia, a housing cost, specified as a weighted average of the traditional user cost

and the lowest possible first-year payments that can be achieved with the financing

options available. The lowest possible first-year payments are defined as:

,min h

y

ponamortisatisrtpayments 1 (1)

where the yield rmin from the 1st quarter of 2000 (when the use of adjustable-rate

mortgages really took off) onwards changes from the 30-year bond yield to a short-

term bond yield (weighted for mortgage bonds with maturities of 1 and 2 years), s is

housing-related taxes (land tax and property value tax), amortisation is the rate of

amortisation for a fully loan-financed house with full utilisation of adjustable-rate

mortgages from the 1st quarter of 2000 and deferred amortisation from the 4th

quarter of 2003, and ph is the real house price.

The traditional user cost is defined as:

(2)

where the square brackets are the real interest rate after tax on 30-year bonds, d is

depreciation and maintenance, and h is the expected (real) capital gain by way of

rising house prices (in excess of the general level of inflation). Inflationary

expectations and the expected capital gains, h , are assumed to depend on the

realised rate of price increase in the preceding years.

In the first of our two models (model A), we let the underlying demand for owner-

occupied housing (KD) be determined by real household disposable income (Y) and a

free combination of user cost and the lowest possible first-year payments. In the

estimation of the model, user cost is split into the actual real house price ph, the user-

cost rate u (excluding expected capital gains, cf. (2)) and the expected capital gains h,

and the first-year payments are split into the real house price and a rate for the first-

year payments, y, cf. (1). More specifically, in the estimation we assume a long-term

housing-demand function of the following kind, where we let data determine the size

of the weight parameter (0< <1) , which indicates the relative impact of the user-

cost rate and the rate for the first-year payments, respectively:

(3)

Model A corresponds to the estimated house-price model that was presented in the

Monetary Review, 1st quarter 2011, Part 2. This model follows the approach of most

other Danish empirical house-price models, in which the user-cost rate and the house

price are traditionally included as separate explanatory variables.

,hh

u

pdsrtuser cost

301

. ,,,, :A Model yucostspcostsYFK HhD 1


37

CONTINUED Box 4

However, economic theory says that the house price interacts in a multiplicative way

with the rates for user cost and first-year payments, as stated in (1) and (2). The reason

is that a given rise in interest rates and a given rise in the amortisation rate on mort-

gage loans have a greater impact on housing costs the more expensive the home is,

i.e. the higher the house price is. In model B we therefore let the long-term housing

demand be given by a function of the form

(4)

Measured by the usual statistical parameters, the two models are more or less equally

successful when confronted with data; for example, both models are able to explain

almost two thirds of the historical fluctuations in house prices.2 Chart 32 shows how

real house prices will, according to the two models, react to a negative shock to the

housing market under various framework conditions.3 The horizontal axes indicate the

number of years passed after a permanent fall of 5 per cent in real disposable income

has taken place. The blue curves in the diagrams indicate the response of house prices

under the current rules for taxation and financing of housing. The yellow curves show

the price response if deferred-amortisation loans were not available and if property

value taxes were linked to developments in house prices so that the effective property

value tax rate remained at around the current level. Hence, the yellow curves describe

the price development under the framework conditions for the housing market

suggested in the Monetary Review, 1st quarter 2011.

According to both models, house prices will fall during the first 6-8 years after the

decline in income. After that prices will begin to pick up, as lower prices lead to a de-

cline in residential investment, which gradually reduces the supply of housing. Accord-

ing to model A (left-hand side of Chart 32) the fall in house prices would be damp-

ened by just over 1 percentage point, corresponding to approximately 15 per cent of

the price fall in the years when the price effect is greatest, if the framework condi-

tions suggested by Danmarks Nationalbank were introduced. These conditions entail

RESPONSE OF HOUSE PRICES TO A DECLINE IN INCOME UNDER DIFFERENT FRAMEWORK CONDITIONS IN THE HOUSING MARKET Chart 32

Model A

-10

-8

-6

-4

-2

0

0 5 10 15 20 25 30

Per cent

Existing framework conditions Changed framework conditions

Model B

-10

-8

-6

-4

-2

0

0 5 10 15 20 25 30

Per cent

Existing framework conditions Changed framework conditions

Note: Source:

The effect on real house prices of a 5 per cent fall in disposable income under the current frameworkconditions in the housing market compared with a situation in which deferred amortisation on mortgageloans is not an option and in which property value taxes mirror house prices so that the effective rate of housing tax remains at around the current level. The calculations have been made on different versions of amodel for the housing market based on separate relations for developments in house prices, cf. the body text. MONA's databank and own calculations.

.,, :B Model hhD pcostsYFK


38

Price developments Inflation, measured as the annual rate of increase in the Harmonised Index of Consumer Prices, HICP, was 3.1 per cent in May, cf. Chart 34. The relatively high rate of consumer price inflation is primarily attrib-utable to rising prices for energy and food, which always fluctuate strongly during periods of commodity price fluctuations. Commodity prices have risen recently.

CONTINUED Box 4

that the nominal property value tax falls in line with house prices, thereby cushioning

the price fall. This automatic stabilising effect has been deactivated due to the current

freeze on nominal property value tax.

Model B (right-hand side of Chart 32) predicts that the framework conditions

suggested by Danmarks Nationalbank would dampen house prices falls by up to 35

per cent. This model also factors in that a fall in the house price means a greater

reduction in the buyer's first-year payments when the loan is with amortisation than

when it is without amortisation. The greater reduction in payments on loans with

amortisation means that house prices do not have to fall so much in order to restore

equilibrium in the housing market after a decline in income.

The actual increase in instability in the housing market caused by the freeze on

property value tax and the introduction of deferred-amortisation loans is probably

somewhere in the range between the model results presented here. This is in line with

the size of the effects calculated using other methods in the Monetary Review, 1st

Quarter 2011.

According to model B, the introduction of adjustable-rate mortgages and the

resulting reduction in the buyers' first-year payments have also amplified the response

of house prices to fluctuations in incomes. The effect of adjustable-rate mortgages is

estimated to have been similar in size to that of deferred-amortisation loans,

assuming that the short-term yield does not respond to fluctuations in income.

Normally the Danish economy moves more or less in parallel with that of the euro

area. Hence, a decline in household income in Denmark often goes hand in hand with

a fall in short-term yields as a result of easing of the ECB's and Danmarks

Nationalbank's monetary policy, and vice versa.4 Via adjustable-rate mortgages, these

changes in short-term yields will be reflected in buyers' first-year payments and thus

counter the fluctuations in house prices resulting from fluctuations in incomes. So

with the appropriate monetary policy, adjustable-rate mortgages will not have the

same destabilising effect on the housing market and the economy as deferred-

amortisation loans.

1 Cf. the articles by Niels Arne Dam et al. in Danmarks Nationalbank, Monetary Review, 1st Quarter 2011, Part 2. 2 The two estimated house-price models are documented in more detail in a working note by Niels Arne Dam,

Afdragsfrie lån, skattestop og udsving i huspriserne (Deferred-amortisation loans, tax freeze and house-price fluctuations – in Danish only), Danmarks Nationalbank, 2011.

3 The price developments have been calculated in a housing model that combines each of the two alternative house-price relations for residential investments estimated in Niels Arne Dam et al., Developments in the market for owner-occupied housing in recent years – Can house prices be explained?, Danmarks Nationalbank, Monetary Review, 1st Quarter 2011, Part 2.

4 Cf. the article The effects of monetary policy in Denmark, p. 51.


39

Core inflation, which excludes energy and food prices, has begun to drift upwards recently, amounting to 1.7 per cent annually in May. A more detailed analysis of the impact of commodity prices and changes in indir-

WAGE GROWTH IN CENTRAL AND LOCAL GOVERNMENT AND IN THE PRIVATE SECTOR Chart 33

0

1

2

3

4

5

6

7

8

9

Central government Local and regional government Private sector


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Hourly wages. The most recent observations are from the 1st quarter of 2011. Confederation of Danish Employers and Statistics Denmark.

INFLATION Chart 34

-5

-4

-3

-2

-1

0

1

2

3

4

5

-15

-12

-9

-6

-3

0

3

6

9

12

15

Consumer price inflation Core inflation Domestic supply of goods (right-hand axis)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Per cent, year-on-year Per cent, year-on-year

Note: Source:

Monthly data. The most recent observations are from May 2011 for consumer price and core inflation and from April for domestic supply of goods. Statistics Denmark.


40

ect taxes on consumer prices is presented in the article Commodity Prices and Inflation in Denmark on p.79.

In the euro area, annual consumer price inflation was 2.7 per cent in May. Like in Denmark, inflation in the euro area has increased due to accelerating energy and food prices.

Wholesale prices, which capture price developments in the first link in the sales chain, have gone up by 8.3 per cent over the last year. The increase has been strongest for goods manufactured in Denmark, which have risen by 10.1 per cent. Wholesale prices traditionally fluctuate more than consumer prices. The reason is that commodity prices have a stronger impact on wholesale prices. The surging wholesale prices may exert upward pressure on consumer prices in the coming months.

Forecast for the Danish economy 2011-13 On the basis of the cyclical trends described above, Danmarks National-bank's most recent forecast for the Danish economy is described below. The forecast has been prepared using the macroeconomic model MONA1 and is based on available economic statistics, including Statistics Den-mark's quarterly national accounts for the 1st quarter of 20112. The underlying assumptions concerning the international economy, financial conditions and fiscal policy are described in Appendix 1. Changes com-pared with the March 2011 forecast are outlined in Appendix 2.

GDP growth is expected to be on the low side of 2 per cent p.a. in 2011-13. Growth in the current year is curbed by the slowdown in the winter of 2010-11. For all years, the increase in output is expected to exceed the underlying growth in the output potential of the economy. This means that capacity utilisation will increase from its current modest level to a more normal level. Growth prospects for Denmark are weaker than the prospects for the USA, where potential growth is higher because the population is growing, but in line with the prospects for the euro area, cf. Chart 35. The upswing in the euro area is impeded by economic problems in member states with sovereign debt crises. But the outlook for Germany for the coming years is good and a little stronger than the outlook for Denmark.

The most significant contribution to growth in the projection comes from exports, cf. Table 2, notably manufactured exports, which will bene-fit from the favourable growth prospects for key export markets such as Sweden and Germany. Manufactured exports have grown steadily since mid-2009 and are approaching the level seen before the international

1 This model is described in Danmarks Nationalbank, MONA – a quarterly model of the Danish

economy, 2003. 2 The calculations are based on statistical information up to and including 10 June 2011.


41

downturn, which led to a fall of approximately 15 per cent in volume terms. Measured in volumes, market shares for Danish manufactured exports have been declining since the mid-1990s. This is attributable to the increasing role of the emerging economies in international trade,

GDP GROWTH IN DENMARK, THE EURO AREA AND THE USA Chart 35

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Per cent

Denmark Euro area USA

Note: Source:

Estimates after the broken line. Statistics Denmark, Reuters EcoWin, OECD, Economic Outlook, No. 89, May 2011, and own forecast.

KEY ECONOMIC VARIABLES Table 2

Real growth on previous year, per cent 2010 2011 2012 2013

GDP ................................................................ 2.1 1.7 2.0 1.6 Private consumption ..................................... 2.2 1.4 2.5 1.7 Public consumption ...................................... 1.0 -0.1 0.8 0.2 Residential investment ................................. -9.4 5.3 2.9 4.1 Public investment ......................................... 7.3 -0.1 -5.1 -3.0 Business investment ...................................... -3.6 -1.5 7.7 7.2 Inventory investment1 .................................. 0.9 0.3 0.2 0.1 Exports ........................................................... 3.6 5.9 3.0 2.9 Manufactured exports ............................... 5.9 4.8 6.3 4.2 Imports .......................................................... 2.9 5.3 4.2 3.9 Total employment, 1,000 persons ............... 2,764 2,764 2,777 2,786 Unemployment, gross, 1,000 persons .......... 165 156 146 139 Unemployment, net, 1,000 persons ............. 114 103 98 95 Balance of payments, per cent of GDP ........ 5.1 5.4 5.0 4.7 Government balance, per cent of GDP ....... -2.8 -4.2 -3.4 -2.7 Cash prices, per cent year-on-year ............... 2.4 0.7 1.3 1.6 Consumer prices, per cent year-on-year ...... 2.2 2.9 1.9 1.8 Hourly wages, per cent year-on-year .......... 2.5 2.5 3.3 3.3

1 Contribution to GDP growth.


42

but also reflects weakening of wage competitiveness over many years. In the crisis years, the loss of market shares slowed down, but new losses have been seen as the international economy has begun to recover since 2009. This reflects the composition of Danish manufactured exports, which makes them less cyclically sensitive than world trade in manu-factured goods overall. In the projection, wages increase only slightly faster than abroad, and in spite of modest losses of market shares exports grow steadily.

Over the last few years, households have used their higher incomes to consolidate, following loss of wealth on housing in particular. Private consumption therefore grew at a subdued pace in 2009-10 and is cur-rently low in relation to the disposable income of the private sector, cf. Chart 36.

Presumably, many households still want to improve their net worth, so although the labour market is beginning to pick up and the housing market has stabilised, only a modest increase in consumption is ex-pected. The consumption ratio hardly increases over the forecast hori-zon. The available indicators point to business investment beginning to rise from a very low level. As output growth accelerates, the substantial spare capacity will dwindle, and recently many firms have posted sound earnings. Against that background, investments are expected gradually to contribute to growth in demand.

PRIVATE CONSUMPTION RATIO Chart 36

80

85

90

95

100

105

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Per cent

Note: Source:

The income concept applied is the private sector's net disposable income less income in the energy sector. Statistics Denmark and own forecast.


43

With higher demand and increasing capacity pressures, the import ratio will rise. In 2012 and 2013 imports are set to grow slightly more than exports. This will contribute to reducing the current-account surplus a little from a level of around 6 per cent of GDP at present, but the surplus remains large throughout the projection period.

The quarterly national accounts for the 1st quarter of 2011 show a modest fall in employment. A decrease in public-sector employment was more or less offset by an increase in private-sector employment. This means that private-sector employment has ceased to decline. Labour productivity has to a large extent been restored following the sharp fall before and during the crisis in 2008 and 2009. In the projection, prod-uctivity increases at a more normal pace so that output growth will lead to a small increase in employment. With the prospect of a cyclical in-crease in the supply of labour, which will more than offset the negative demographical trends, this will gradually reduce net unemployment from 102,800 people in April to just under 100,000 at the end of the forecast period. This virtually corresponds to the estimated structural unemployment.

In 2010 wage inflation in the private-sector labour market was 2-2.5 per cent year-on-year. This is in line with the level abroad, albeit higher than in the euro area. At the same time, it is considerably lower than in the preceding years, reflecting the weakening of the labour market. In the projection, wage inflation increases to more than 3 per cent year-on-year in 2012 and 2013 as the labour market slowly begins to tighten.

As previously mentioned, consumer prices, HICP, rose by 3.1 per cent year-on-year in May 2011, while core inflation, which excludes price developments for energy and food, was 1.7 per cent year-on-year in May. Hence the rising commodity prices have had only a limited knock-on effect on other prices. The indirect effect on other consumer prices via energy used in the production of these goods has so far been ab-sorbed by corporate profit margins – which is highlighted by the fact that domestic market-determined inflation, IMI, has been negative since mid-2010. The risk of second-round effects, whereby rising consumer prices lead to higher wage pressures, is also assessed to be modest given the current weak capacity pressure, provided that commodity prices do not continue to increase rapidly. Against this background, the rate of inflation is estimated to decline gradually over the projection horizon, to just under 2 per cent year-on-year in 2012 and 2013, cf. Table 3. The forecast does not factor in any effects of the agreement on a retirement reform concluded by a majority of the Folketing (Danish parliament) in May as this agreement will only be implemented in legislation if a majority can also be mustered after the next general election. If the


44

agreement is implemented, contributions made to the early retirement scheme from 1999 until 15 May 2011 can be disbursed in 2012. Box 5 describes how this may affect the forecast.

CONSUMER PRICES Table 3


Weight1

2010

2011

2012

2013

Q1 2011

Q2 2011

Q3 2011

HICP ................................. 2.2 2.9 1.9 1.8 2.6 3.0 3.0

Index of net retail prices 100 2.0 2.8 2.2 1.9 2.5 3.0 3.0 Exogenous: Energy ........................... 7.1 12.3 12.9 2.5 1.3 13.3 13.7 15.5 Food ............................... 13.1 -0.2 4.0 2.5 1.7 3.0 4.8 4.3 Adm. prices ................... 4.2 3.9 1.8 2.8 3.2 3.8 1.6 1.0 Rent ............................... 23.6 2.6 2.9 3.2 3.0 2.8 3.0 2.8 Excl. exogenous .............. 52.0 0.6 1.0 1.6 1.4 0.3 1.0 1.1 Imports .......................... 15.6 0.8 4.7 0.9 1.1 4.6 5.6 4.3 IMI .................................. 36.4 0.5 -0.5 1.9 1.6 -1.3 -0.8 -0.2

Note: In the index of net retail prices, indirect taxes and duties have been deducted from consumer prices, while anysubsidies have been added.

1 Weight in the index of net retail prices, per cent.

EFFECTS OF THE RETIREMENT AGREEMENT IN THE FORECAST PERIOD 2011-13 Box 5

The Danish government has concluded an agreement on a retirement reform with the

Danish People's Party and the Social-Liberal Party. The agreement will only be

implemented in legislation if it can muster a majority in the Folketing after the next

general election. Consequently, the reform has not been taken into account in the

baseline forecast scenario.

The core elements of the agreement, which is aimed at increasing the labour force,

will not take effect until after the forecast period. These include postponement of

early retirement and old-age retirement, shortening of the early retirement period

and introduction of a senior citizen social pension scheme. However, the agreement

will also enable untaxed disbursement in 2012 of contributions to the early retirement

scheme made in the period from 1999 until 15 May 2011 for people who leave the

scheme before reaching the eligible age for early retirement. For people who have

contributed to the scheme throughout this period, this is equivalent to kr. 60,514

(2011 level). In addition, increased offsetting of other pensions will make it less

attractive to join or remain in the scheme, and hence in future fewer people can be

expected to contribute to the scheme.

In the following, the macroeconomic effects of the retirement agreement over the

forecast horizon are compiled on the basis of a MONA calculation. Total contributions

to the early retirement scheme, indexed to wages, amount to around kr. 60 billion. There


45

Economic policy Now that the necessary consolidation of public finances has begun, the Danish economy is, as stated above, expected to grow at a moderate pace, driven by exports and private domestic demand. The strong econ-omic upswing in Germany and Sweden is favourable to Danish export-ers. These two countries are now reaping the benefits of many years of disciplined fiscal policies combined with structural reforms to increase the supply of labour. These efforts meant that they avoided overheating of the economy in the years preceding the crisis, which is one of the

CONTINUED Box 5

is considerable uncertainty as to how many people will opt to leave the scheme if

given the opportunity. The following assumes a tax-free disbursement of kr. 20 billion

in 2012, corresponding to one third of the revalued contributions. From 2012, annual

contributions to the scheme are assumed to fall from kr. 6 billion to kr. 4 billion.

Repayment of early retirement contributions will increase disposable income in

2012, and growth in private consumption will increase to 3.1 per cent in 2012, up from

2.5 per cent in the baseline scenario, cf. Table 4. The higher growth in demand will lift

GDP growth by 0.2 percentage point to 2.2 per cent. The government budget balance

will deteriorate by just over kr. 20 billion in 2012 due to the repayments and the

lower volume of contributions to the scheme. In 2013 the government deficit is of the

same magnitude as in the baseline scenario, while consumption and GDP growth are

slightly higher and unemployment a little lower. Wage and price inflation is

marginally higher in 2013 than in the baseline scenario.

BASELINE SCENARIO AND ALTERNATIVE SCENARIO Table 4

Baseline scenario Retirement agreement

2012 GDP, per cent year-on-year ............................... 2.0 2.2 Private consumption, per cent year-on-year..... 2.5 3.1 Unemployment, net, 1,000 persons .................. 98 97 Government balance, per cent of GDP ............. -3.4 -4.5 HICP, per cent year-on-year .............................. 1.9 1.9

2013 GDP, per cent year-on-year ............................... 1.6 1.6 Private consumption, per cent year-on-year .... 1.7 1.8 Unemployment, net, 1,000 persons .................. 95 92 Government balance, per cent of GDP ............. -2.7 -2.6 HICP, per cent year-on-year .............................. 1.8 1.8

The calculation assumes a normal consumption response to higher income and does

not take into account that some participants in the early retirement scheme may have

seen their contributions as savings. If that is the case, a larger share of the amount

disbursed is likely to be saved, and the positive effects on consumption and activity

estimated above will be on the high side.


46

reasons why they have emerged from the crisis sooner than most other countries.

In Denmark, the economy has developed much more slowly after the crisis, reflecting factors such as weaker wage competitiveness and the housing market bubble in the pre-crisis years. This emphasises the im-portance of pursuing a restrictive fiscal policy when the economy is in an upswing and of designing housing taxes and mortgage financing so as to reduce large fluctuations in the housing market.

In the wake of the financial crisis, residential and business investment has dropped sharply, and both households and the corporate sector have increased their savings considerably. The private sector's savings surplus, calculated as the difference between its savings and investment, is now at the highest level since World War II. It is not likely that the savings surplus will remain at this unusual level for an extended period.

Consequently, the last six months' downturn in the economy is expected to make way for renewed growth as savings and investment return to more normal levels. The large savings surplus in the private sector at present constitutes substantial pent-up purchasing power that can easily be converted into increased consumption and investment if a positive shift is seen in household and business expectations.

To ensure a long and sustained upswing, it is important that the in-crease in the supply of labour and production capacity can keep up with the expected increase in private-sector demand. Exactly when private demand will begin to increase in earnest cannot be said for certain, but prudence and the long-term need to consolidate would indicate that fiscal policy should remain prudent in the coming years.


47

APPENDIX 1: ASSUMPTIONS IN THE FORECAST FOR THE DANISH ECONOMY

The projection is based on a number of assumptions concerning the international economy, financial conditions and fiscal policy.

The international economy The world economy is still in an upswing, although there is substantial variation in developments across regions and countries. Germany and Sweden, two of Denmark's most important trading partners, have seen high economic growth and rising employment. Given the expected de-velopment in the international economy, the market for Danish exports is assumed to grow by a good 7 per cent in 2011 and 2012, while growth is assumed to be a little lower in 2013, cf. Table 5.

In response to the high commodity prices, prices for foreign goods imported into Denmark are set to rise more this year than last year. The increase is assumed to subside in 2012 and 2013. This also applies to price increases in the manufactured export markets. Wage increases abroad are estimated to be modest throughout the projection period as labour markets are weak in most countries.

Interest rates, exchange rates and oil prices In the forecast, the development in short-term and long-term interest rates is based on the expectations that can be derived from the interest-

OVERVIEW OF FORECAST ASSUMPTIONS Table 5

2010 2011 2012 2013

International economy: Export market growth, per cent year-on-year .. 10.9 7.2 7.3 5.6 Export market price1, per cent year-on-year ..... -0.9 2.5 1.7 1.2 Foreign price2, per cent year-on-year ................ -0.7 2.6 1.7 1.2 Foreign hourly wages, per cent year-on-year ... 2.6 1.8 2.3 2.7

Financial conditions, etc.: 3-month money-market interest rate, per

cent p.a. .............................................................. 0.6 1.2 1.7 2.0 Average bond yield, per cent p.a. ..................... 2.7 3.1 3.6 4.0 Effective krone rate, 1980 = 100 ........................ 104.0 103.8 104.0 104.0 Dollar exchange rate, DKK per USD .................. 5.6 5.2 5.2 5.2 Oil price, Brent, USD per barrel ......................... 80.3 113.7 113.3 109.7

Fiscal policy: Public consumption, per cent year-on-year ...... 1.0 -0.1 0.8 0.2 Public investment, per cent year-on-year ......... 7.3 -0.1 -5.1 -3.0 Public-sector employment, 1,000 persons ......... 840 839 842 842 1 Weighted import price for all countries to which Denmark exports. 2 Weighted export price for all countries from which Denmark imports.


48

rate curves in the financial markets. Short-term interest rates have con-tinued to rise. The 3-month money-market interest rate, which was 1.1 per cent p.a. in early June 2011, is expected to rise to a level of around 2 per cent p.a. by 2013. This is slightly lower than assumed in the previous forecast. The average bond yield is also expected to be slightly lower over the projection period. It was 2.8 per cent p.a. at the beginning of June and will rise to 4 per cent p.a. by 2013.

The effective exchange rate of the krone is a little stronger than in the March forecast, reflecting the weakening of the dollar and the pound sterling vis-à-vis the euro and hence also the Danish krone. In the projec-tion the dollar rate and the effective krone rate are assumed to remain constant at the level from early June.

At the time of forecasting, the price of oil was around 115 dollars per barrel. In the projection oil prices are expected to develop in line with futures prices, falling to just under 110 dollars per barrel in 2013. This is more or less the same as in the March forecast.

Fiscal assumptions Fiscal policy in the forecast is based on the Finance Act for 2011 and regional and local government budgets for 2011. Real public consump-tion is assumed to fall marginally this year and then to grow by 0.8 per cent in 2012 and 0.2 per cent in 2013. Public investment is expected to be virtually unchanged this year and then to fall in 2012 and 2013 in step with the planned consolidation.


49

APPENDIX 2: REVISIONS IN RELATION TO THE PREVIOUS FORECAST

The estimated growth in GDP in 2011 has been adjusted slightly down-wards relative to the March forecast, cf. Table 6, in which the revisions of GDP and consumer prices are broken down by key background fac-tors. A slightly stronger effective exchange rate of the krone points to lower growth, and likewise the weak preliminary national accounts data for the 1st quarter of the year dampen output growth in 2011. In 2013 activity is boosted by an upward adjustment of export market growth and slightly lower interest rates than in the March forecast. Other fac-tors, including data revisions, make only modest contributions to the re-vision of the estimated GDP growth for the period overall.

Consumer price inflation has been revised upwards to 2.9 per cent in 2011, primarily on account of developments that have already taken place. The higher price increases are mainly attributable to energy, food and imported goods.

REVISIONS IN RELATION TO THE PREVIOUS FORECAST Table 6

GDP Consumer prices, HICP

Per cent, year-on-year 2011 2012 2013 2011 2012 2013

Forecast, March 2011 ...................... 1.9 1.8 1.5 2.4 1.8 1.7 Contribution to revised estimate from: Export market growth ............... 0.0 0.0 0.2 0.0 0.0 0.0 Interest rates .............................. 0.0 0.0 0.1 0.0 0.0 0.0 Exchange rates ........................... -0.1 -0.1 0.0 0.0 -0.1 0.0 Oil prices ..................................... 0.0 0.0 0.0 0.0 0.0 0.0 Other factors .............................. -0.1 0.2 -0.2 0.4 0.2 0.1

This forecast .................................... 1.7 2.0 1.6 2.9 1.9 1.8

Note: The transition from the previous to this forecast may not add up due to rounding. "Other factors" includes data revisions.


51

The Effects of Monetary Policy in Denmark

By Peter Askjær Drejer, Statistics Marianne Clausager Koch, Economics Morten Hedegaard Rasmussen, Economics Morten Spange, Economics Søren Vester Sørensen, Economics

INTRODUCTION AND SUMMARY

What are the effects of a change in monetary-policy interest rates? That is the key question which we address in our analysis presented in Part 2 of this Monetary Review. This article summarises the most important findings of the analysis.

Changes of monetary-policy interest rates have a potential impact on households and firms via two channels: the interest-rate channel and the credit channel.1 The interest-rate channel applies when a change in monetary-policy interest rates is passed through to the banks' retail rates in relation to households and firms. We find that the pass-through is high, but there are indications that it has diminished in connection with the financial crisis.2

According to the hypothesis concerning the credit channel, a change in monetary-policy interest rates may influence the total supply of loans. One reason is that banks may have to reduce their lending because their capital base has deteriorated since an interest-rate increase undermines the value of their assets. Moreover, the value of the firms' assets is reduced, so that they are less able to provide collateral for loans when monetary policy is tightened. On the basis of an analysis of lending by Danish banks, we are not able to demonstrate that the credit channel plays an important role in cyclical developments in Denmark. Neverthe-less, the financial sector has a cyclical impact on the economy, as the banks' interest-rate margin tends to widen during a downturn and narrow during a boom. As the cyclicality of the interest margin is likely

1 In an economy with a floating exchange rate, an interest-rate change will also impact on the

exchange rate. This channel is not considered here. 2 Moreover, there will be an effect on short-term mortgage yields. Below we focus on the pass-

through to bank retail rates.


52

to reflect cyclically related changes in the risk of loan losses to a high degree, this is inevitable in a market economy.

The key conclusion of the article is that monetary policy is primarily transmitted through the interest-rate channel, while changes in the total supply of loans are not found to play an important role. Conse-quently, we present an analysis of the development in the interest-rate sensitivity of the economy since 1995. There are three classic effects of interest-rate changes, i.e. the direct effect on income, the effect on private-sector wealth and the effect on the incentive to save. We focus on the income channel, which is the channel that has potentially been affected the most by the changed patterns of household financing. The analysis shows that the sensitivity to fluctuations in short-term interest rates has increased considerably over the last decade for both house-holds and firms. This can be attributed to more widespread use of adjustable-rate loans and to higher indebtedness.

If the cyclical position in Denmark resembles that of the euro area, higher interest-rate sensitivity may be an advantage. But if interest-rate sensitivity is higher in Denmark compared with the euro area as a whole, it is not a clear-cut advantage. In that case, the interest-rate changes of the European Central Bank, ECB – which are appropriate for the euro area's cyclical position – may be too strong for Danish conditions, although the relatively high tax deductibility of interest payments in Denmark will mitigate this effect to some extent. Moreover, the higher interest-rate sensitivity presents a clear challenge if the cyclical devel-opment in Denmark deviates from that of the euro area, or if interest-rates are changed to defend the krone.

INTEREST-RATE PASS-THROUGH

Danmarks Nationalbank occasionally adjusts the level of monetary-policy interest rates vis-à-vis the group of banks acting as monetary-policy counterparties. This is an element of the fixed-exchange-rate policy to keep the krone stable against the euro. The changes impact on bank retail interest rates in relation to households and firms. This is because monetary-policy interest rates are alternatives to the interest rates on loans and placements in the money market, whereby monetary-policy interest rates play a crucial role for money-market interest rates. Conse-quently, monetary-policy interest rates determine the price of the banks' liquidity and thus their funding costs in Danish kroner.

We have analysed how much bank retail rates change after a change of monetary-policy interest rates. In the period before the financial crisis, 90 and 98 per cent of the changes of monetary-policy interest


53

rates had been passed through, after three months, to lending and deposit rates, respectively, for households, cf. Chart 1. After the crisis, the pass-through, especially to deposits, seems to have declined, and there are tentative signs of a lower overall pass-through. For firms, the overall pass-through after three months in the period up to the financial crisis was 78 per cent for loans and 92 per cent for deposits, cf. Chart 1. As with lending to households, there is a tendency for interest-rate pass-through to have declined in extent and speed after the crisis. This applies to both deposits and loans.

The lower pass-through on the deposit side can potentially be explained by the intensified competition for deposits, fuelled by some banks' liquidity problems in connection with the financial crisis. The banks therefore refrained from matching Danmarks Nationalbank's interest-rate reductions. An alternative explanation could be that Dan-marks Nationalbank's interest-rate changes to a lower degree mirrored the ECB's changes of its official interest rates, which may have made it more difficult for the banks to assess the duration of the changes. Moreover, the low level of monetary-policy interest rates in 2010 may have contributed to reducing the pass-through since deposit rates have traditionally been lower than the monetary-policy interest rates and interest rates cannot be negative.

Whether the fall in the interest-rate pass-through can be expected to last depends on the underlying causes. There are indications that the

PASS-THROUGH TO RETAIL INTEREST RATES (SECTOR LEVEL) Chart 1

0

10

20

30

40

50

60

70

80

90

100

Pre-crisis Post-crisis Pre-crisis Post-crisis Pre-crisis Post-crisis Pre-crisis Post-crisis

Lending Deposits Lending Deposits

Change in interest rate on certificates of deposit two and three months earlier

Change in interest rate on certificates of deposit one month earlier

Change in interest rate on certificates of deposit in the same month

Per centHouseholds Corporate sector


54

reduced pass-through can, to some extent, be attributed to specific crisis-related factors, which cannot be expected to be permanent.

We examine whether certain characteristics determine how the banks adjust interest rates in response to changes in monetary-policy interest rates. We classify the banks according to three key indicators measuring their liquidity and access to funding, i.e. deposits as a ratio of lending, excess liquidity coverage relative to the statutory minimum and the size of the balance sheet. For all three ratios a high value indicates better access to funding.

The pass-through is highly similar across the different groups. We can only identify one instance of significant difference in the coefficients for households, i.e. for deposits, where the pass-through is higher for large banks than for smaller banks. This may reflect that smaller banks usually have poorer access to liquidity via the money markets so they have had to operate with higher interest rates than their competitors in order to attract deposits. This has potentially impeded the full pass-through of the reduction in monetary-policy interest rates. However, it may also reflect that large banks are generally the first to adjust their interest rates, while the smaller banks wait and see what the large banks do. There are no significant differences as regards lending to firms.

Given the very similar degrees of pass-through for the various groups, there does not seem to be any marked explanatory effect from the bank-specific characteristics.

THE BANK LENDING CHANNEL

The credit channel, describing the dependence of the total supply of loans on monetary policy, can be divided into a bank lending channel and a balance-sheet channel. The bank lending channel relates to banks' ability to lend. A higher level of interest rates in the economy typically leads to increasing losses and provisions on loans and reduces the value of the banks' asset portfolios. This has a negative impact on their capital adequacy and may force them to reduce lending to ensure continued compliance with capital adequacy requirements, thereby reinforcing the contractive effect of an interest-rate increase.

We look into the bank lending channel by examining whether a link exists between the banks' lending growth and a number of bank-specific characteristics. We assume the same growth in the demand for loans across banks. This means that differences in lending growth, if any, reflect only differences in the supply of loans. The heterogeneity across banks provide for analysis of whether the supply of loans varies across banks with different values for selected bank-specific criteria.


55

In general, the analysis finds no significant variations in banks' lending growth based on the various measures of financial strength. Neverthe-less, a graphic analysis indicates that the banks with the highest excess liquidity coverage in 2006 have shown the highest growth in lending to households since the financial crisis, cf. Chart 2.1 This may suggest that the lending of some banks has been restricted by a shortage of liquidity. However, the difference in lending growth between the two groups is modest and may be attributable to other factors beyond the scope of the graphic analysis. This is supported by the considerably lower varia-tion in lending growth to firms although this type of lending also re-quires liquidity. Consequently, there are no clear indications that the banks experienced shortages of liquidity for lending purposes during the financial crisis. The access to Additional Tier 1 capital in connection with Bank Rescue Package 2 may have helped to prevent a tightening of credit standards via the bank lending channel. But it cannot be ruled out that the banks may have tightened their lending irrespective of their positions before the crisis.

In an econometric analysis, we examine whether a bank's charac-teristics have influenced its lending growth in the event of a change in monetary-policy interest rates. Hence, we examine whether the banks' balance sheets play a role in the transmission of monetary policy. If a bank lending channel exists, we would expect differences in banks' lend-

1 For the period 2001-07 no clear correlation is evidenced between excess liquidity coverage and

lending growth.

MEDIAN FOR LENDING GROWTH GROUPED BY EXCESS LIQUIDITY COVERAGE Chart 2

-15

-10

-5

0

5

10

15

20

Low excess liquidity coverage High excess liquidity coverage

2008 2009 2010

HouseholdsPer cent

-10

-5

0

5

10

15

20

Low excess liquidity coverage High excess liquidity coverage

Per cent

2008 2009 2010

Corporate sector

Note: Source:

The Chart shows median lending growth for the two groups of banks, i.e. the half with the lowest excessliquidity coverage and the group with the highest. Excess liquidity coverage is excess liquidity beyond the statutory minimum requirement (the 10 per cent requirement under section 152 of the Danish Financial BusinessAct) as a percentage of the statutory requirement. The banks are categorised on the basis of their financial ratiosat end-2006. Danish Financial Supervisory Authority and Danmarks Nationalbank.


56

ing growth when conditions in the money market change. This does not seem to be the case.

THE BALANCE-SHEET CHANNEL

The balance-sheet channel is the part of the credit channel that relates to the balance sheets of the borrowers. This channel is based on the assumption that a tightening of monetary policy will erode the value of the firms' and households' assets. This applies to both real assets, e.g. machinery and buildings, and financial assets. Hence, the firms' provision of collateral for loans is restricted. Moreover, an interest-rate increase can be expected to lead to lower demand, which will reduce the firms' future earnings. According to the hypothesis of a balance-sheet channel, this makes the banks more reluctant to lend.

The balance-sheet channel will imply that firms for which a credit rating is difficult to perform are particularly dependent on access to internal financing for investment purposes. An analysis of whether this applies to Danish firms requires construction of a data set with financial statements for the firms over a number of years. That is beyond the scope of this article. There are several international studies of the balance-sheet channel. Some of them conclude that it is primarily relevant for small firms, while it has no appreciable impact on larger firms. In order to examine whether the credit conditions show different patterns for large and small firms in Denmark over the business cycle, we look at devel-opments in interest-rate spreads between large and small corporate loans.

Data for lending rates broken down by loan size is only available from 2003, so the analysis is based on the experience gained during the most recent business cycle. In the years up to the peak of the financial crisis in 2008, the interest-rate differential between small and large bank loans to firms was approximately 1 percentage point, cf. Chart 3. This was almost half the level seen in the preceding period. The very low interest-rate margin is probably attributable to the search for yield in the period up to the crisis, which resulted in interest rates not always reflecting the actual risk on the loan.

In connection with the crisis, the differential widened substantially to around 3 percentage points, which is the highest level since the start of the series in 2003. This indicates that the financial crisis impacted primarily on the financing conditions of small firms. For large firms, the balance-sheet channel does not seem to play any important role. Their interest-rate margins have been less affected, and they also have easier access to alternative sources of financing. Consequently, the balance-sheet channel does not play an important role in Denmark at the macro level.


57

INTEREST-RATE MARGINS AND THE BUSINESS CYCLE

Even in the absence of a credit channel as such, the financial sector may still impact on the business cycle. This applies e.g. if the interest-rate margin follows a cyclical pattern. The banks' loan losses tend to rise during an economic downturn, which they can factor in by increasing their interest-rate margin. Moreover, they will be reluctant to expand their market share during a downturn since that entails a substantial risk of attracting customers with poor credit standings who have been re-fused credit by other banks. Consequently, the banks may potentially use their knowledge of the credit risk for existing customers to raise interest rates on loans to these customers beyond what is warranted by the risk of loss, without the customers turning to other banks.

We look into the cyclicality of the interest-rate margin, measured by the dynamic correlations between the cyclical components of the interest-rate margin and gross domestic product, GDP, respectively, cf. Chart 4, left. The negative contemporaneous correlation coefficient indicates that the interest-rate margin is countercyclical. Hence, it amp-lifies business cycles.

If the banks are forward looking, they will begin to adjust the interest-rate margin ahead of the economic reversal. This will be reflected in a strong correlation between the margin and future GDP growth. How-ever, we find the strongest empirical correlation between the interest-

INTEREST RATES ON SMALL AND LARGE NEW LOANS TO THE CORPORATE SECTOR Chart 3

0

1

2

3

4

5

6

7

8

Per cent

Interest-rate differential between small and large loans3-month Cibor, monthly averageNew lending to the corporate sector, up to kr. 7.5 millionNew lending to the corporate sector, more than kr. 7.5 million

2003 2004 2005 2006 2007 2008 2009 2010

Source: Danmarks Nationalbank.


58

rate margin and GDP 0-2 quarters back in time. This indicates that the banks are more likely to be lagging slightly behind the business cycle when adjusting their deposit and lending rates. Since 1995, the banks have tended to be more forward looking when adjusting interest rates on loans to households, compared with adjusting interest rates on loans to the corporate sector, cf. 4, right.

INTEREST-RATE SENSITIVITY OF INCOMES

Monetary policy works primarily via the pass-through to money-market interest rates and retail rates, and through interest rates on financial claims. We examine how households and firms are affected by an in-crease in monetary-policy interest rates. Three classic channels are typic-ally mentioned, i.e. the direct income effect, the wealth channel and the effect on the incentive to save. We focus on the income effect, which is the channel that is potentially affected the most by the more wide-spread use of variable-rate loans for house purchase.

As a result of adjustable-rate loans, households have become markedly more sensitive to fluctuations in short-term interest rates, cf. Chart 5, left1. The calculation is based solely on the items on the households'

1 The calculation example is based on an estimate of household financial assets and liabilities with

floating rate or initial rate fixation period of up to 1 year. For example, in 2010 the households' adjustable-rate loans with floating rate or initial rate fixation period of up to 1 year amounted to kr. 1,460 billion (i.e. adjustable-rate mortgages with floating rate or initial rate fixation period of up to 1 year (based on estimates) for kr. 857 billion and bank loans amounting to kr. 603 billion). Bank deposits and holdings of short-term bonds totalling kr. 624 billion are offset against this amount. This results in net household liabilities with floating rate or initial rate fixation period of up to 1 year amounting to kr. 836 billion. If these liabilities are assumed to follow short-term interest rates, a rise in the short-term interest rate by 1 percentage point will lead to increased expenditure of kr. 5.7 billion after tax at a tax rate of 32 per cent. This corresponds to 0.7 per cent of total household disposable income.

CORRELATION BETWEEN INTEREST-RATE MARGIN AND OUTPUT GAP IN PREVIOUS, CURRENT AND SUBSEQUENT QUARTERS Chart 4

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Interest-rate margin

Quarters

Correlation with historical GDP Correlation with future GDP

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Corporate sector interest-rate margin Household interest-rate margin

QuartersCorrelation with historical GDP Correlation with future GDP

Note: Source:

The calculation is for the cyclical component of the time series, defined as the deviation from an HP-filtered trend. The left-hand chart is based on data for 1983-2010. The right-hand chart is based on data for 1995–2010. Danmarks Nationalbank and Statistics Denmark.


59

financial balance sheet for which interest payments will be affected, within a short time horizon, by changes in short-term interest rates (i.e. bank deposits and loans, short-term bonds and adjustable-rate mort-gages with floating rate or initial rate fixation period of up to 1 year). A rise by 1 percentage point in short-term interest rates causes household disposable income to fall by approximately 0.7 per cent in 2010. Previously, this effect was relatively limited.1 Consequently, the house-holds have become more sensitive to interest rates.

This calculation is partial since we do not take into account that a large proportion of mortgage bonds is owned indirectly by the house-holds via their pension savings. However, this applies mainly to long-term bonds, while short-term bonds are predominantly owned by banks. We also exclude other effects of an interest-rate increase on household disposable income resulting from the pass-through to the economy (e.g. via employment), or via changes in households' transactions. Finally, we do not take into account the effects of interest-rate adjustments on other financial items, such as adjustable-rate mortgages with initial rate fixation periods over 1 year.

Other countries have also seen growth in household indebtedness and more variable-rate loans. But in an international context, the interest-

1 It is difficult to determine a comparable direct effect on households from changes in long-term

interest rates. Long-term interest rates have no immediate direct effect on households' interest expenditure on loans, since interest payments on fixed-rate loans are fixed. On the other hand, there may be effects from conversion of mortgage loans.

HOUSEHOLDS' AND FIRMS' SENSITIVITY OVER TIME TO AN INCREASE OF 1 PERCENTAGE POINT IN THE SHORT-TERM INTEREST RATE Chart 5

-0.2-0.10.00.10.20.30.40.50.60.70.8

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Overall effectEffect from mortgage loans with interest-rate adjustment up to 1 year

Percentage decrease in disposable income (after tax)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Overall effectEffect from mortgage loans with interest-rate adjustment up to 1 year

Fall in profit after tax as percentage of gross value added

Note: Source:

Mortgage loans with interest-rate adjustment up to 1 year consists of adjustable-rate mortgages with floating rate or initial rate fixation period of up to 1 year. Some underlying data in the calculation are partly based on estimates. The effect via pension wealth is excluded. A higher interest rate entails a higher yield on pension wealth, which will, in the longer term, flow back to the households as higher pension disbursements. Conversely, this is only to a limited extent determined by short-term interest rates since pension companies invest primarily in long-term bonds and shares. Association of Danish Mortgage Banks, Statistics Denmark, Ministry of Finance, Danmarks Nationalbank and owncalculations.


60

rate sensitivity of Danish households is high due to the combination of high gross indebtedness and widespread use of variable-rate loans.

Chart 5, right, shows a calculation of how a change in short-term inter-est rates impacts on firms' profits relative to gross value added. Like the corresponding calculation for households, this calculation is based on non-financial corporations' holdings of mortgage loans with interest-rate adjustment within 1 year, loans and deposits in banks and holdings of short-term bonds1. Hence, the interest-rate sensitivity has increased considerably for firms, too, over the last decade, but unlike for house-holds, the more widespread use of adjustable-rate loans explains only half of the overall change. Another key factor is the higher indebted-ness.

When assessing the broad implications of more pronounced interest-rate sensitivity, a key issue is whether the monetary-policy interest rates are generally "appropriate" in relation to the cyclical pattern. If monet-ary policy is in sync with the business cycle, a high pass-through to the real economy should be regarded as an advantage. But if changes in monetary-policy interest rates are independent of the business cycle and are prompted by e.g. the need to address speculative pressure on the krone, the effect may be procyclical.

The close correlation between cyclical patterns in Denmark and the euro area can be expected to continue. This is attributable to Denmark's close integration with the euro area in both real economic and financial terms. In normal situations, the ECB's monetary policy will therefore still be appropriate for Denmark's cyclical pattern to a reasonable degree. But in so far as the interest-rate sensitivity of the Danish economy is higher than that of the euro area, fluctuations in monetary-policy inter-est rates can be envisaged to have a more pronounced effect on cyclical patterns in Denmark compared with the euro area. Moreover, there may be situations where unilateral Danish interest-rate increases are required due to pressure on the krone, as seen e.g. during the financial crisis in the autumn of 2008. The more widespread use of variable-rate loans and the general growth in household gross debt have clearly increased the sensitivity of households to unilateral Danish interest-rate increases.

1 A tax rate of 28 per cent is applied in the calculation for firms.


61

International Commodity Prices: Cycle, Bubble or Level Shift?

Niels Peter Hahnemann and Marianne Clausager Koch, Economics


Commodity prices soared from the millennium until the 2008 financial crisis. A sudden price drop in the wake of the crisis was followed by a fresh wave of commodity-price increases. This article places current com-modity-market developments in a historical perspective and explores the special characteristics of these markets. We discuss whether price devel-opments are attributable to cyclical factors or are the result of a specula-tion-driven bubble; or, conversely, whether increases in relative com-modity prices are conditional on structural factors.

The sharp fluctuations in commodity prices seen during the last decade are reminiscent of those of the 1970s. The main explanations for the re-cent price rises are the growing importance of commodity-intensive emerging economies in the world economy since 2000 and the failure of oil production, in particular, to keep up with this development. In the short term, factors such as extreme weather conditions, turmoil in oil-producing countries, export restraints and the global crisis have also played a part. However, the resource-intensive industrialisation process in the Asian economies will continue for a number of years to come. A change of policy towards the promotion of alternative sources of energy and phase-out of energy subsidies is required if the rise in commodity prices is to be curbed.

HISTORICAL PERSPECTIVE

In the 2000s, commodity prices showed a strong upward trend. This trend was temporarily interrupted by the global economic downturn during the financial crisis, but was resumed as the world economy re-covered. Price developments for oil and industrial metals have been quite dramatic, but prices of agricultural products have also displayed strong fluctuations, cf. Chart 1.

Prices of oil and agricultural products other than food (e.g. cotton, rubber and timber) have soared by about 200 per cent since early 2009,


62

while prices of industrial metals and food have risen by 150 per cent and 51 per cent, respectively. In most advanced economies, food and energy are included in the consumer price index basket with a weight of approximately one-fifth, while the weights are higher in emerging and developing economies. Consequently, surging commodity prices have fanned inflation. In 2008, commodity-price increases were smaller in euro terms than in dollars, as a higher euro/dollar exchange rate shielded the euro area member states and Denmark from part of the price rise. As the relative strengths of the euro and the dollar have varied somewhat during the last 18 months, this exchange-rate impact has been less significant during the latest period of rising commodity prices.

The current price of a barrel of Brent crude oil is 116 dollars (early June). Recently, the price has dropped from its preliminary peak of approximately 128 dollars a barrel in early May. So far, the price has not exceeded the peak of 143 dollars a barrel reached in mid-2008. Prices of food and industrial metals, on the other hand, are roughly unchanged from 2008, while prices of agricultural products other than food are much higher in 2011 than they were in 2008. Oil and agricultural prod-ucts have been affected by temporary supply and demand shocks, e.g. in the form of extreme weather conditions, the global crisis and, as far as oil is concerned, turmoil in the Middle East and North Africa in 2011.

PRICE DEVELOPMENTS FOR SELECTED COMMODITY GROUPS Chart 1

0

50

100

150

200

250

300

350

400

450

500

2003 2004 2005 2006 2007 2008 2009 2010 2011

0

50

100

150

200

250

300

350

400

450

500

Brent crude oil Industrial metalsFood Agricultural commodities other than foodConsumer prices, OECD

Index, 3 Jan 2003 = 100

Note: Source:

The industrial metals index, the food Index and the index for agricultural commodities other than food arecommodity indices prepared by The Economist. Industrial metals are aluminium, copper, nickel, tin and lead. Food includes coffee, soya beans, sugar, cocoa, meat, wheat and soya bean oil. Agricultural commodities other than food include cotton, wool, rubber, timber, palm oil and coconut oil. Reuters EcoWin.


63

In a historical perspective, only one period in recent decades has seen similar dramatic and rapid fluctuations in commodity prices. In the 1970s, prices surged, driven by strong global demand and temporary shortages of oil, in particular, caused by an OPEC export embargo. In real prices, the oil-price fluctuations of 2007-08 and 2009-11 were similar in size to the oil-price shocks of the 1970s, cf. Chart 2 (left)1. Relative to the gross domestic product, GDP, the oil-price shocks of the 1970s led to a greater increase in the oil bill in most Western countries than the oil-price rise in 2007-08 because production was more oil-intensive in the 1970s. As far as agricultural products are concerned, the real price fluc-tuations of recent years are relatively minor compared with the fluctu-ations of the 1970s and early 1980s, cf. Chart 2 (right). Energy demand Demand for oil, coal and natural gas grew steadily during the decade up to 2008, cf. Chart 3 (left). Increased demand from resource-intensive economies, including China, was a key driving factor, China accounting for just under 55 per cent of global growth in primary energy consump-tion2 in the period 2004-08. China's share of the world's total energy consumption has increased in recent decades, especially since 2000. During the 5-year period specified, China accounted for 16 per cent of the global consumption of primary energy resources, while Europe and

1 For a long-term historical overview of commodity-price developments, see O'Connor and Orsmond

(2007). 2 Primary energy sources are oil, coal, natural gas, nuclear energy and hydropower.

REAL AND NOMINAL PRICE DEVELOPMENTS FOR SELECTED COMMODITIES, 1960-2011 Chart 2

0

50

100

150

200

250

300

350

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Crude oil, nominal Crude oil, real (CPI)

Index, Jan 2005 = 100

0

100

200

300

400

500

600

700

800

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Food, nominal Food, realOther agricultural commodities, nominal Other agricultural commodities, real

Index, Jan 2005 = 100

Note: Source:

Real commodity prices are calculated by deflating nominal prices by US consumer prices excluding energy andfood. Whether consumer prices or wages are used as the deflator does not change the overall picture as therehas been relatively close correlation between US consumer prices excluding food and energy and US hourlywages over time. Crude oil is Brent crude oil. In the 10-year period 1960-70, the series has been extended backwards by the changes in the price of West Texas Intermediate crude oil. United Nations Conference on Trade and Development, UNCTAD and Reuters EcoWin.


64

the USA accounted for approximately 18 and 21 per cent, respectively. As opposed to China's, the US and European shares of consumption have shown a slightly receding trend in the last two decades.1

In other words, growth in China and other resource-intensive econ-omies is a key driver of the price increases observed since 2000. More-over, the price elasticity of oil demand is low, especially in non-OECD countries, and the possibility of substitution between energy sources is limited in the short term. Consequently, higher prices are reflected in demand to a moderate extent only.2 The energy intensity of a country's output, i.e. energy consumption per unit of GDP, is a major factor in its demand for primary energy. The energy intensity of the industrialised world and the emerging economies varies greatly, as does the primary energy type used, cf. Chart 4 (left). While the main source of energy in the USA and the EU is oil, the energy consumption of China and Russia is based primarily on coal and natural gas.

Other aspects of significance to energy demand are subsidisation and energy taxation. Energy consumption is mainly subsidised in the emerging and developing economies, serving to distort relative prices and weaken price signals. The value of energy subsidies exceeds 10 per cent of GDP in some countries but is lower in most countries. In key emerging economies, such as China, Indonesia, Mexico and South Africa, the value of fossil-fuel subsidies accounted for 1-2 per cent of GDP in 2009.3 According to the International Energy Agency, IEA, these subsidies totalled 312 billion dollars in 2009. Estimates vary consid-

1 See IMF (2011) Chapter 3 and BP (2010).

2 See e.g. Wurzel et al. (2009).

3 See IEA (2010), Part E.

CONSUMPTION (LEFT) AND PRODUCTION (RIGHT) OF OIL, COAL AND NATURAL GAS Chart 3

0

2

4

6

8

10

12

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

OECD Middle East and Africa China Others Total

Billion tonnes (oil equivalent)

0

2

4

6

8

10

12

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

OECD Middle East and Africa China Others Total

Billion tonnes (oil equivalent)

Source: BP (2010).


65

erably, however.1 If subsidies are phased out by 2020, calculations show that demand for primary energy will fall by 5 per cent.2 Conversely, many OECD countries – particular European ones – tax energy consump-tion. Energy supply The supply of oil, coal and natural gas has also grown over the last de-cade. Growth in production has been in non-OECD countries only, cf. Chart 3 (right) – as far as oil is concerned especially in the former Soviet Union and Africa. Growth in oil production has been tapering off to almost nothing in recent years, cf. Chart 4 (right) – both in OPEC and non-OPEC countries.

An increasing number of aging oil fields play an important part in this respect, as oil production from fields approaching the end of their life cycle eventually flattens or declines. The speed of this process and the extent to which discontinued fields can be replaced by new ones are of key importance to the global oil supply. A special feature of oil prod-uction is that it takes time to expand capacity. It may take 10 years or more from the initial investment to first production, depending on the complexity of the project.3 The incentive to invest in oil extraction de-

1 Global Subsidies Initiative assesses that the value of fuel subsidies may be up to 600 billion dollars a

year. Calculating the total value of subsidies is technically challenging and, accordingly, estimates vary considerably, see Global Subsidies Initiative (2010). Moreover, the value of these subsidies naturally fluctuates with world market prices of fuels.

2 See IEA et al. (2010).

3 See e.g. IMF (2011), Chapter 3.

ENERGY-INTENSITY IN PRODUCTION IN SELECTED COUNTRIES, BROKEN DOWN BY ENERGY TYPE (LEFT), 2009, AND GLOBAL PRODUCTION OF OIL, 1965-2009 (RIGHT) Chart 4

0

10

20

30

40

50

60

USA EU Russia China Key emergingeconomies,excl. China

Oil Natural gas Coal Nuclear energy Hydropower

Million tonnes (oil equivalent) as a ratio of GDP

10

20

30

40

50

60

70

80

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

Production of oil OPEC Non-OPEC

Million barrels a day

Note: Source:

Energy intensity measured as the total consumption of primary energy as a ratio of GDP at market prices (currentprices). OPEC consists of Algeria, Angola, Libya, Nigeria, United Arab Emirates, Kuwait, Iraq, Iran, Qatar, Saudi Arabia, Ecuador and Venezuela. BP (2010) and Reuters EcoWin.


66

pends on the expected price and the investment costs. High current oil prices ensure the profitability of more investment projects and could help to stimulate further investment in oil extraction. On the other hand, recent developments could indicate a rise in investment costs. Costs for oil and gas projects more than doubled from 2000 to 2010.1 Measured at constant prices, investments have been more or less flat during recent years.2 Supply of and demand for agricultural products Food and other agricultural products have not shown the same sus-tained upward trend in prices as energy commodities. Increases in food prices in 2007-08 and 2010-11 have also been more moderate than for other commodities, cf. Chart 1. But there are considerable differences in price developments from one food product to the next. The latest in-crease has been driven primarily by sugar, vegetable oils and cereals, in-cluding wheat, maize and rice. On the demand side, food prices, like energy prices, are impacted by the growing world population and rising incomes; increased demand for food crops for the production of biofuels is another factor.

Demand for agricultural products for the production of biofuels is a recent phenomenon, which is expected to grow in importance over the coming decades.3 Feed grain (such as maize and barley) and sugar cane are the major crop inputs in ethanol production, while vegetable oils are the main ingredients in the production of biodiesel. In 2007-09, approxi-mately 9 per cent of the global output of vegetable oils and feed grain was used in the production of biofuels, while the corresponding per-centage for wheat and sugar cane was about 1 per cent. These percent-ages are likely to grow considerably over the coming decade.4

While demand has been the primary driver of oil prices, higher food prices in recent years can be attributed mainly to lower supply. Weather-related production disruptions have been key factors in the price rises seen since mid-2010. Production shortfalls have driven stocks to low levels, which may in itself have led to greater price fluctuations in the markets for these commodities.5 To this should be added increased trade policy intervention, including import tariffs and quotas, making it diffi-cult for supply and demand to converge in the global market.

1 Measured by the IHS/CERA Upstream Capital Costs Index, UCCI, tracking the costs of equipment,

facilities, materials and personnel in 28 geographically diversified oil and gas extraction projects. 2 See e.g. Inter-American Development Bank (2010) and IEA (2010).

3 See OECD-FAO (2011).

4 See OECD-FAO (2010), Chapter 4.

5 See FAO (2010).


67

SPECIAL FACTORS IN THE COMMODITY MARKETS

Commodity trading markets are global, entailing that prices are pre-dominately determined by the world market.1 The market for oil and energy, in particular, is fully internationalised. Price changes to crude oil e.g. from the Middle East, Russia, the North Sea and Texas usually mirror each other closely. Most commodities are settled in dollars and depre-ciation of the dollar, as in 2008 and 2010, could induce producers (i.e. exporters) to raise the price in dollars to compensate for the lower value of the dollar in terms of their own currencies.

Oil and energy are important elements in the production of agricul-tural and other commodities. Energy costs account for a significant part of the agricultural sector's total operating costs. Consequently, prices of other commodities, such as food and metals, correlate with global energy prices in the long term. Although international trade in agricul-tural commodities has grown during the last 50 years, the proportion of total output that is traded in the world market is still significantly lower than in the industrial sector. Therefore, local and regional supply and demand factors are more likely to impact agricultural prices. The cor-relation between changes in the prices of oil and, respectively, food and metals has increased significantly during the last 20 years, cf. Chart 5, possibly because of increased globalisation, higher production of bio-fuels and more financial investment in commodity trading.

Commodity prices are affected by cyclical fluctuations in the world economy and regionally. Special circumstances in the commodity mar-kets may also cause sustained fluctuations in prices. In addition, it is pos-sible that "speculative" trading in commodity derivatives may impact commodity prices. Finally, underlying structural changes in the world economy and in production technology may require commodity prices to adjust to a new long-term level. The following sections discuss these issues.

Cyclical fluctuations Relative to previous years, 2010 saw a particularly sharp increase in oil demand from non-OECD countries. This applied especially to China, whose oil demand grew by 12 per cent, compared with an average annual increase of just over 7 per cent in 2004-09.2 Usually, the OPEC output is able to bridge the gap between supply and demand, as the supply from non-OPEC oil producers, such as Russia and Canada, is re-

1 As previously stated, tariffs, public subsidies and taxation provide some scope for decoupling

domestic consumer and producer prices from world-market prices. 2 Cf. IMF (2011), Table 1.2, p. 33.


68

latively steady. However, the crude oil market has come under pressure from developments in 2010.

In 2010, the markets for food and metals were squeezed by a growing gap between consumption and output. The global supply of a number of agricultural products contracted, while demand remained more or less unchanged, causing stocks to fall.1 As stocks provide a buffer against shocks in supply and demand, thereby dampening price fluctuations, small stocks tend to cause stronger fluctuations in prices. Stocks are low when output is having difficulty keeping up with demand and prices become relatively high. Accordingly, a positive correlation may arise between the level of commodity prices and their fluctuations.

The world economy began to recover in 2009-10, but the sharp in-crease in commodity prices indicates that cyclical factors were not the only ones at play. If investment in commodity production shows a lagged response to changes in supply and demand and, at the same time, a long period of time elapses from the investment is made until new production capacity is ready, slow cyclical price fluctuations may occur – a super cycle. These cyclical fluctuations do not necessarily coincide with general cyclical developments. For oil and mining, for

1 Cf. FAO (2010).

COMMODITY-PRICE CORRELATIONS Chart 5

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

Food and oil Metals and oil

1995 1997 1999 2001 2003 2005 2007 2009 2011

Correlation coefficient

Note: Source:

5-year moving correlation coefficient between changes week-on-week in The Economist's food and metals price indices in dollars and the price in dollars of Brent crude oil. Reuters EcoWin.


69

example, the period from initial investment to first production could be 10 years or more.1

After a prolonged period of low commodity prices in the 1990s, investment in raw material extraction has been low for a number of years. Moreover, the cost of investing in e.g. oil operations has been surging in recent years. The result has been commodity shortages, putting an upward pressure on commodity prices that was temporarily interrupted in 2008-09 by the global economic crisis.2 If the effects of the ordinary economic cycle and the long-term trend in commodity prices are filtered out, a trend equivalent to a super cycle is observed in commodity prices, as several commodities experienced upswings in prices in the 1960-70s and again since the late 1990s, cf. Chart 6. Agricultural products, such as wheat and cotton, are seen to have less amplitude, which may be attributable e.g. to a shorter lag time between investment and production.

Price bubbles? Lately, there has been an international debate about whether trading in commodity derivatives has created a price bubble in the commodity

1 Cuddington and Jerrett (2008), and IMF (2011) Chapter 3.

2 See IMF (2011) Chapter 3, and Danske Research (2011).

COMMODITY-PRICE SUPER CYCLES Chart 6

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

Wheat Cotton Copper Oil

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Log price

Note: Source:

A Christiano-Fitzgerald band-pass filter has been applied to the price index in dollars to filter out cyclical changesand trends. Own calculations and UNCTAD.


70

markets. A bubble occurs if prices do not reflect "fundamentals", i.e. underlying supply and demand factors in the markets.

Trade in futures plays a key role in the commodity markets. Commod-ity futures are standardised contracts for delivery of a specific volume of commodities of a given quality at an agreed future point in time at an agreed price. Participants in the futures market are both "hedgers", hedging the risk of future price changes, and investors or "speculators", assuming risks. Hedgers are typically commodity-producing or com-modity-consuming firms wishing to ensure a fixed price on their future sale or purchase of the commodity. Speculators are players who, without hedging their risk, enter into a futures contract on the expectation of turning a profit on the gap between the futures price of the commodity and its expected future spot price. Commodity arbitraging ensures a link between futures and spot prices, cf. Box 1.

Recent years have seen a pronounced increase in turnover of financial derivatives, the return on which is linked to price developments for com-modity futures, and new commodity derivatives have been developed to increase the risk-diversification opportunities of financial investors. These developments may have fuelled the demand for commodity futures. The question is whether the increasing demand for commodity futures has also contributed to raising spot prices and amplifying their fluctuations.

There is broad consensus that the growing trade in commodity derivatives has not been the main driver of the commodity-price rises of recent years. But there is some disagreement as to whether develop-ments in derivatives markets have played any part in prices.1 A wide-spread view is that speculation in the commodity markets can only drive up spot prices if the supply of commodities in the spot market is being held back for speculative stock building.

The analysis in Box 1 shows that both current spot prices and current futures prices vary positively with expected future spot prices, which depend on expected future supply and demand factors in the spot mar-kets. If speculators trade on the basis of mistaken expectations of future market conditions, speculation may affect spot prices in a different di-rection than warranted by underlying supply and demand factors for a while. However, speculators have a personal interest in making the most informed guesses about future spot prices. Therefore, it is hardly likely that increased speculative activity in the derivatives markets would sys-tematically drive up commodity prices.

1 See e.g. Hamilton (2008) and Irwin et al. (2009).


71

COMMODITY PRICES: SPECULATION AND HEDGING Box 1

A "speculator" may take an open position in the commodity market at time t e.g. by

purchasing a futures contract, thereby undertaking an obligation to purchase a

commodity at the future point in time T at the agreed futures price ,t TF . When

entering into the contract, the speculator expects that at time T, he will be able to

resell the commodity at spot price ,Et TS . The present value of his expected future

income is

,E T tt T

dS e , where e is the exponential function and d is the rate of interest

by which the uncertain, and thus risky, future income ,Et TS is discounted. In contrast,

the speculator's future costs of meeting the futures contract are certain and fully

predictable costs with the present value of

,r T t

t TF e , where r is the risk-free interest

rate. In a competitive futures market, the futures price will be competed down to a

level at which the present value of the speculator's open position is zero, allowing for

the risk of the position. In other words, market equilibrium requires that

, ,r T t E T t

t T t TdF e S e , i.e.

, ,E r d T t

t T t TF S e (1)

A "hedger" who needs the commodity for production purposes at time T may enter

into a futures contract to purchase the commodity at that time at the futures price of

,t TF . Alternatively, he may opt to purchase the commodity already at the current

time, t, at the current spot price of tS and keep the commodity in stock until it is

needed in production. To purchase the commodity, the hedger must draw on his bank

account, which entails interest costs per period equivalent to the risk-free interest rate

of r for each krone of capital that is tied up in the commodity inventory. On the other

hand, the inventory may carry a convenience yield y – which may materialise e.g.

because the commodity may be included in production immediately or may be sold

immediately if market developments in the period until time T make this attractive. As

the convenience yield is calculated net of inventory costs, the net costs per period of

holding the commodity would be r-y. In the period until time T, the total accumulated

costs of purchasing the commodity at time t and holding it in stock would be r y T t

tS e . In market equilibrium, the ratio of the spot price to the futures price will

be such that it is equally attractive for hedgers to purchase a commodity for future

delivery and to purchase it immediately and keep it in stock until it is needed. In other

words, such equilibrium requires that

,r y T t

t T tF S e (2)

By inserting (2) in (1), we get the following correlation between the current and the

expected future spot price:

,E y d T t

t t TS S e (3)

Equation (3) shows that fluctuations in speculators' expectations of future spot prices

and fluctuations in their required risk premiums (and thus in the discount rate of d)

could lead to fluctuations in the spot price. Notably, the spot price will be driven up

here and now if speculators expect future price increases for the commodity.

According to (1), an increase in the expected future spot price will also drive up

current futures prices.


72

The analysis in Box 1 also shows that spot prices and futures prices of commodities are impacted by the risk premiums demanded by specu-lators. As investment in commodity derivatives becomes more popular as an alternative to investment in other financial assets, it is possible that these risk premiums will increasingly covary with the risk premiums of the financial markets. Accordingly, financial market fluctuations may have a greater knock-on effect on commodity markets than previously seen. In the 2000s, commodity-price volatility was generally higher than in the 1990s and volatility has been especially high during periods of great economic uncertainty, cf. Chart 7. Empirical studies have found it difficult to establish whether speculative trading in commodity deriva-tives leads to systematic fluctuations in spot prices. The primary role of speculative investors seems to be that of providing liquidity to the com-modity markets.1

Global developments in income and output also indicate that general supply and demand factors are largely able to explain the surge in oil prices in 2010. This is illustrated by a simple calculation. Global GDP, and thus total income, rose by 5 per cent in 2010. Average oil prices surged by close to 20 dollars a barrel equivalent to an increase of just over 30 per cent relative to 2009. The multiplier effect on GDP growth of an oil-price rise of 10 dollars is an estimated 0.2 percentage point, so without an oil-price rise of 20 dollars, global GDP growth would have been 5.4

1 IMF (2006) Box 5.1 Chapter 5, and Danske Research (2011).

CONTINUED Box 1

As mentioned in the main article, recent years have seen an upsurge in commodity-

derivatives trading, the return on which is linked to developments in prices of

commodity futures. This may have caused an increase in demand for commodity

futures. However, as (3) illustrates, the current spot price is determined by the

expected future spot price, as well as by the risk appetite (d) and the convenience

yield on holding the commodity in stock. Outside the model (1)-(3), the expected

future spot price is determined by expected future supply and demand factors in the

spot market for the commodity in question. There is no reason to assume that

increased demand for commodity derivatives in itself has had a systematic impact on

fundamental supply and demand factors in the commodity markets. Thus, it does not

seem likely that increased commodity-derivatives trading has resulted in systematic

rises in commodity prices.

All the same, the fact that commodities are increasingly seen as a separate asset

class that could be an alternative to, for example, financial assets could have resulted

in closer correlation between the risk premiums used by investors in pricing of

commodities – cf. equation (3) – and the risk premiums in the financial markets. This

may have contributed to increasing volatility in commodity prices.


73

per cent in 2010. With the trend towards higher energy efficiency, a given percentage increase in global GDP will not trigger the same per-centage rise in global oil demand. Hence GDP growth of 5.4 per cent is estimated only to trigger a 3.8 per cent increase in oil demand (corres-ponding to income elasticity of 0.7). In 2010, actual oil output rose by 3.2 per cent and, accordingly, the excess demand was 0.6 per cent. The actual oil-price rise of just over 30 per cent in 2010 may be perceived as the increase required to absorb excess demand. This is equivalent to short-term numerical price elasticity of oil demand of 0.6/30 = 0.02, which is in line with the elasticity estimated by the International Monetary Fund, IMF. According to this calculation, the oil-price rises can be attributed to market shortages.1

Level shift? It is also being debated whether recent years' increases in commodity prices reflect a level shift resulting from underlying structural changes, requiring that prices be adjusted to a higher long-term level. In GDP terms, emerging economies consume substantially more oil than, for example, the EU. With the globalisation of the world economy, a large segment of the industrialised countries' manufacturing sector has been

1 IMF (2011) Table 1.2 p. 33 and Chapter 3; OECD (2011) p. 31. (The GDP multiplier applies to the OECD

countries only and the implied price elasticity calculated is thus a low estimate.)

COMMODITY-PRICE VOLATILITY Chart 7

0

1

2

3

4

5

6

7

8

9

Oil Food Metals

Change week-on-week, per cent, standard deviation

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Note: Source:

Calculated on the basis of The Economist's food and metals price indices and the price in dollars of Brent crude oil. Reuters EcoWin.


74

relocated to China, especially since the country's membership of the World Trade Organization in 2001. As a result, China has massively expanded its demand for oil, metals and other commodities. China's im-ports of metals for the manufacturing sector now account for a signifi-cant share of global demand. The same trends are evidenced in other developing countries experiencing strong growth, and the production of the emerging economies is generally more commodity-intensive than that of the advanced economies. Consequently, global demand for manufactured commodities has increased.

In a long-term perspective, the commodity demand of the developing countries seems to be converging towards that of the advanced econ-omies. When GDP per capita increases, so does energy demand, but it is evident that the pace of increase diminishes for high income levels, cf. Chart 8. The wide gap in energy consumption between the USA and the EU hinges, inter alia, on differences in the taxation of energy, including petrol.

Rising income and urbanisation in the developing countries increases meat consumption, among other things, so that more cereals, especially maize, are required in the production process. In recent years, China, which used to be self-sufficient, has begun to import maize as feed grain for its growing herds of cattle. Given the vast difference in calorie intake between rich and poor nations, the developing countries must be ex-pected to increase their food demand as they become richer.

ENERGY CONSUMPTION CONVERGENCE 1990-2009 Chart 8

0

1

2

3

4

5

6

7

8

9

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

Korea China Turkey USA EU15GDP per capita

Oil equivalents per capita, tonnes

Note: Source:

The horizontal axis represents purchasing-power adjusted GDP in dollars per capita. IMF, OECD and BP (2010).


75

Food production consumes more and more resources. Historically, agri-cultural output has outstripped global population growth. Much of the increase in the crops of developing countries has come from the culti-vation of new land. In future, competition for land and natural re-sources, such as water, will intensify due to urbanisation and increased production of biofuels, combined with continued population growth. Sharper competition for land for alternative uses could make it more dif-ficult to expand agricultural output.

Against this backdrop, increased demand must be expected to trans-late into higher prices. The close correlation between energy prices and other commodity prices indicates that the convergence process extends to all commodities. This means that the current price increases should probably be seen as part of an extended adjustment process to a per-manently higher level of relative commodity prices.

SUPPLY AND DEMAND SCENARIOS

There are various scenarios for the future development of commodity prices, reflecting diverging expectations of supply and demand factors. Uncertainties are many and include both economic and demographic factors, as well as technology developments and political decisions re-lating to, for instance, energy subsidies. The IEA (2010) presents a model-based projection of supply and demand for primary energy sources until 2035, using three policy scenarios with different degrees of fuel subsidy phase-out. The projections clearly illustrate the impact of the policies of the coming decades on the development in commodity demand – and thus commodity prices.1

The current trend towards increased demand for energy is expected to persist and, in its central scenario, the IEA projects that by 2035 demand will have grown by 36 per cent compared with 2008 levels. The com-position of energy demand is projected to change in the period until 2035, with alternative fuels, such as nuclear energy and biomass, gaining ground. But fossil fuels (oil, coal and natural gas) are still expected to account for more than half of the total primary energy demand.2

1 The three policy scenarios are: "Current Policies", "New Policies Scenario" (central scenario) and "The

450 Scenario". Current Policies is based on the assumption that current announcements of a phase-out of fossil-fuel subsidies are implemented. In the central New Policies Scenario it is assumed that fossil-fuel subsidies are completely phased out by 2020 in all net importing areas, while net exporting countries are assumed to continue their current policies. The 450 Scenario assumes that fossil-fuel subsidies will be completely phased out by 2020 in net importing countries and by 2025 in net exporting countries, with the exception of the Middle East. The projections were prepared assuming that average population growth would be 0.9 per cent a year, while average global GDP growth would be 3.2 per cent a year.

2 The share of fossil fuels in the total energy demand will be reduced from approximately 81 per cent

in 2008 to 62-79 per cent in 2035, depending on the policy scenario.


76

On the supply side, the main challenge envisaged by the IEA is to pro-vide global energy resources at a pace that will keep up with demand. According to the IEA, non-OECD countries will account for the bulk of the growth in output to be realised over the coming decades. In the two least energy-saving policy scenarios, oil output is projected to increase by 18-29 per cent to approximately 100 million barrels a day by 2035 compared with about 83 million barrels a day in 2009. Due to the age of existing fields, output will diminish from approximately 68 million bar-rels a day to about 16 million barrels a day in the central scenario. Accordingly, most of the oil demand during the projection period will be met through extraction from undeveloped fields and fields that are yet to be discovered.

In the forecast, the commodity price will be determined as the price necessary to stimulate sufficient supply-expanding investments so as to ensure balance between supply and demand. For oil, the required price change is considerable. Depending on the policy scenario, the (nominal) price of crude oil must rise to 163-244 dollars a barrel by 2035, from a level of about 60 dollars a barrel in 2009, in order for supply and demand to balance. The most substantial price adjustment is projected by the scenario of current policies, requiring a real price increase of 124 per cent. However, similar real price adjustments have been seen over the last four decades.

A major uncertainty in these projects is how supply and demand in the energy markets will respond to higher income and prices – known as income and price elasticities. Higher price elasticities in supply and demand dampen long-term oil-price rises. Many developing countries use public energy subsidies to reduce the energy costs of households and firms. The end-price is often adjusted so that the subsidy element varies positively with world-market prices and the energy demand of the country in question remains unaffected. These subsidies contribute to lowering the price elasticity of global oil demand, thereby increasing fluctuations in the world-market price. In general, the price elasticity of oil demand is lower in the developing countries than in the industri-alised countries, on account of factors such as price subsidies. Moreover, the close correlation between the oil price and other commodity prices serves to increase the pass-through of oil-price changes to consumer price inflation. The significance of energy taxes and subsidies is also re-flected in far higher energy intensity in production in the USA than in the EU.

Higher oil and energy prices put pressure on public budgets which subsidise energy consumption. This may already be observed. In the long term, population growth must be expected to intensify the pressure on


77

a number of depletable resources, including fossil fuels. This, in combin-ation with climate and environmental considerations, would speak in favour of phasing out the massive subsidies for fossil fuels in many coun-tries and replacing them by taxation to reduce the negative external impacts of these types of energy.

CONCLUSIONS

The latest commodity-price increases are attributable to several factors. Increasing global demand, driven by emerging economies, the depre-ciation of the US dollar, insufficient investment in new production cap-acity after several years of low prices, supply shocks caused by extreme weather conditions, price subsidies and export restraints. Part of the in-creases in prices can be explained by cyclical factors, while another part reflects long-term adjustment to a higher level of prices.

The main explanations for the recent price rises are the growing im-portance of commodity-intensive emerging economies such as China in the world economy since 2000 and the failure of oil production, in par-ticular, to keep up with this development. The energy intensity of global production has been declining since the 1970s, and this trend towards more energy-efficient production is likely to continue in the future. But with the pace of economic growth in the emerging economies, global oil demand has outstripped production capacity. A similar increase in demand is seen for a number of other commodities, and there seems to have been a shift towards a higher level of relative commodity prices.

The resource-intensive industrialisation process in the Asian economies will continue for a number of years to come. Although the rate of in-crease in the emerging economies' commodity demand will presumably decrease as per capita income increases, it is uncertain whether the production capacity of the oil industry will be able to keep up with the increasing demand. The future scenarios of the IEA point to continued rapid oil-price increases and, in the assessment of the IMF, the oil market is experiencing a period of increasing shortage. Given the close price correlation, this may have a knock-on effect on other commodity prices. Another factor is the general pressure on resources from a growing world population.

Overall, several factors give reason to expect relatively higher com-modity prices in the future. However, the possibility of switching to alternative sources of energy and political decisions to shift from sub-sidies to taxes on fossil fuels could dampen this development.


78

LITERATURE

BP (2010), Statistical Review of World Energy, June. Cuddington, John T., Daniel Jerrett (2008), Super cycles in real metals prices? IMF Staff Papers, Vol. 55, No. 4, pp. 541-565. Danske Research (2011), Commodities 2011, January. FAO (2010), Food Outlook, November. Global Subsidies Initiative (2010), Untold billions: Fossil-fuel subsidies, their impacts and the path to reform, March. Hamilton, James D. (2008), Understanding crude oil prices, University of California, San Diego. IEA (2010), World Energy Outlook. IEA, OECD, OPEC and the World Bank (2010), Analysis of the scope of energy subsidies and suggestions for the G20 initiative, joint report, June. IMF (2006), World Economic Outlook, September. IMF (2011), World Economic Outlook, April. Inter-American Development Bank (2010), What determines investment in the oil sector?, Working paper, No. 209. Irwin, Scott H., Dwight R. Sanders, Robert P. Merrin (2009), Devil or angel? The role of speculation in the recent commodity price boom (and bust), Journal of Agricultural and Applied Economics, Vol. 41, No. 2, August. O'Connor, J. and D. Orsmond (2007), The recent rise in commodity prices: a long-run perspective, Reserve Bank of Australia Bulletin, April. OECD (2011), Economic Outlook, No. 89, May. OECD-FAO (2011), Agricultural Outlook, June. OECD-FAO (2010), Agricultural Outlook, June. Wurzel, E., L. Willard, and P. Ollivaud, (2009), Recent oil price move-ments, OECD Working Papers, No. 737.


79

Commodity Prices and Inflation in Denmark

Morten Spange, Economics


One of Danmarks Nationalbank's main objectives is to ensure price stability. In practice, monetary policy is planned with a view to keeping the krone stable against the euro. Danish monetary policy thus reflects the policy of the European Central Bank, ECB, whose main objective is to keep inflation in the euro area below, but close to, 2 per cent a year. The Danish economy is closely integrated with that of the euro area. As a result of Denmark's fixed-exchange-rate policy, monetary policy that ensures low inflation in the euro area will also lead to low inflation in Denmark. And since 1990, inflation in Denmark has in fact averaged 2.1 per cent, measured by the annual rate of increase in the Consumer Price Index, CPI.1

In the long term, inflation is determined by monetary policy. However, shocks continually hit the economy, causing inflation to fluctuate around its long-term level. In the short to medium term, inflation is, to a large extent, determined by capacity pressures. An increase in demand leads to higher capacity pressure, which is reflected in rising prices. Inflation is also impacted by supply-side factors – for example, new technologies could enable a reduction in production costs. Changes in indirect taxes are also reflected in inflation, as are factors originating outside Denmark. An increase in import prices has a knock-on effect on inflation. The same applies if commodity prices rise.

Recently, consumer price inflation has been above 2 per cent. According to the Harmonised Index of Consumer Prices, HICP, inflation was 3.1 per cent in May, cf. Chart 1. Strong fluctuations in commodity prices cause energy and food prices to fluctuate markedly. Core infla-tion, which excludes energy and food prices, is more stable, at 1.7 per cent in May. Two factors stand out in relation to consumer prices in recent years, i.e. higher indirect taxes on energy, tobacco and a number of unhealthy food items, phased in during 2010, and price increases on energy and food on the commodity exchanges since early 2010. On the

1 See Spange (2009) for a discussion of the link between monetary policy and inflation.


80

other hand, the weakening in private-sector demand since 2008 has had a dampening impact on inflation.

In 2009, the Folketing (Danish parliament) adopted the Spring Package 2.0 tax reform, introducing higher taxes on energy, tobacco and un-healthy food from 1 January 2010. According to the Ministry of Finance, this increased the tax burden of Danish households by just under kr. 4 billion in 2010, equivalent to approximately 0.5 per cent of private con-sumption.1 Assuming full pass-through to consumer prices, the Spring Package caused HICP inflation to rise by an estimated 0.5 percentage point in 2010. Provided that the tax increases are fully passed through to consumer prices in the month of implementation, their direct impact on annual consumer price inflation lapses after exactly one year. Accord-ingly, the tax changes that took effect on 1 January 2010 no longer impact inflation from January this year onwards, but inflation is still boosted by some further minor tax increases, phased in in July 2010.

The strong fluctuations in inflation during recent years are driven mainly by commodity prices. If commodity prices go up, this has a direct impact on consumer prices for energy and food. The production costs of firms will also be affected, which may, in turn, filter through to the prices of other goods. A rise in commodity prices provides a lift to prices, but will not, in itself, have any sustained impact on inflation. However,

1 See the Ministry of Finance (2009).

INFLATION Chart 1

-10

-5

0

5

10

15

HICP Core inflation Food Energy


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

The most recent observations are from May 2011. Statistics Denmark.


81

periods of rising commodity prices entail a risk of a wage-price spiral, which creates a sustained lift to inflation. Experience from the past decade indicates that increases in energy and food prices have only a temporary impact on inflation in Denmark. Overall, the analyses in this article suggest that the relatively high consumer price inflation seen during recent months will be transitory. INFLATION AND COMMODITY PRICES

Prices of a number of commodities have been fluctuating greatly in re-cent years, including food, metal and oil prices, cf. Chart 2. The run-up to the 2008 financial crisis was marked by rising prices, with particularly strong increases for oil and food. In the autumn of 2008, price rises were followed by sharp declines, oil prices plunging to less than one third of their peak levels. Since early 2009, commodity prices have been surging again, and food prices in dollar terms are now exceeding the peak levels of 2008.1

Consumer prices for energy and food are not determined by com-modity prices alone. Consumer prices also cover costs and profits related to processing and distribution etc. Moreover, indirect taxes constitute a significant part of the consumer prices of many types of energy. Still, fluctuations in commodity prices are clearly reflected in consumer prices of energy and food, which jointly account for 27.8 per cent of the over-all weight basis for HICP. As prices of most other goods and services are relatively stable, fluctuations in energy and food prices explain a signifi-cant proportion of the overall variation in inflation during the last de-cade, cf. Chart 3.

Commodities, especially energy, are also a significant input in the production and distribution of a number of products that are not dir-ectly related to energy and food. Consequently, increases in commodity prices typically have a broader impact on consumer prices. This was evidenced after the surge in commodity prices in 2007-08 when core in-flation, which excludes energy and food, began to rise, cf. Chart 3. When commodity prices dropped in the 2nd half of 2008, core inflation declined, although the effect was lagged. The last year has seen a mod-erate increase in core inflation, possibly driven by the rise in commodity prices. The slower increase in core inflation at present should be seen in the context of relatively weak private-sector demand, rendering it more difficult for firms to pass on cost increases to consumers.

1 See the article by Niels Peter Hahnemann and Marianne Clausager Koch, International commodity

prices: Cycle, bubble or level shift?, p. 61 for an analysis of the factors driving commodity-price developments.


82

COMMODITY PRICE INDEX Chart 2

0

50

100

150

200

250

300

350

400

450

500

Metals Food Oil

Index, 2000 = 100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Prices are in dollar terms. The most recent observations are from May 2011. HWWI / Reuters EcoWin.

CONTRIBUTIONS TO HICP Chart 3

-1

0

1

2

3

4

5

Core inflation Energy Food HICP

Per cent

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

Core inflation is HICP excluding energy and food. The most recent observations are from May 2011. Statistics Denmark.


83

Using an input-output-based analysis, it is possible to calculate total energy input costs for each krone spent on private consumption. In this way, indirect energy costs related to the manufacture of non-energy products are also included. This may be used to calculate the effect on the overall consumer-price index of an increase in the price of energy input in production. This calculation is based on the assumptions that a change in prices does not lead to a change in the composition of production factors and that factor prices are fully reflected in consumer prices. Furthermore, it has been assumed that indirect taxes are inde-pendent of factor prices.1

An input-output-based analysis indicates that a 1 per cent increase in the factor price of energy input leads to an increase of approximately 0.056 per cent in consumer prices, cf. Statistics Denmark (2011). This masks wide variations across consumer goods. For example, energy-input costs account for slightly more than half of the overall consumer prices of electricity, gas and other fuels and just under one third of the costs of fuels and lubricants for personal transport equipment. So even for these energy-intensive consumption components, a significant proportion of costs is attributable to other production factors (or indirect tax pay-ments).

The energy content of other consumption is approximately 2 per cent. Consequently, a 1 per cent increase in energy-input prices may raise con-sumer prices of non-energy products by 0.02 per cent. The calculations do not take into account that a price increase also leads to higher in-direct tax payments, e.g. in the form of VAT. This means that the figures should be seen as a lower limit to how much a commodity-price increase impacts consumer prices, assuming full pass-through. COMMODITY PRICES AND SECOND-ROUND EFFECTS

Initially, a rise in commodity-prices increases the overall consumer-price index. However, inflation will not be directly affected in the longer term, provided that commodity prices remain at their new, higher level and do not increase further. All the same, during periods of rising energy and food prices there are often concerns that they might trigger a sustained lift in inflation, e.g. through wage formation.

1 The same principle applies to the calculation of domestic market-determined inflation, IMI, see

Hansen and Knudsen (2005). IMI is calculated by subtracting a number of "exogenously" determined prices that do not reflect the development in the domestic market from HICP. As part of this "stripping" of HICP, the indirect energy and import content is also deducted, based on input-output weights.


84

Higher prices of selected goods categories inevitably result in an increase in the overall consumer-price index. If it is not evident that inflation will be kept in check in the longer term, employees will believe that the rise in inflation is likely to be a lasting phenomenon. Higher inflationary expectations could increase employee wage demands in collective bargaining.

Higher wage increases that are not grounded in correspondingly higher productivity growth will be reflected in higher consumer prices. If employee wage demands soar on the back of higher commodity prices, a wage-price spiral could be created. This was the case in many countries in the 1970s when surging oil prices provided a sustained lift to infla-tion. The term second-round effects is often used to describe a situation in which higher commodity prices produce higher wage demands, in-ducing a long-term rise in inflation.

Statistics Denmark compiles data of consumers' perception of current prices compared with prices 12 months ago and their expectations of price developments for the coming year. Both in 2008 and during the past year, the increase in actual inflation was reflected in the consumers' perception of the current price level, cf. Chart 4. Especially the latest

INFLATION EXPECTATIONS ACCORDING TO THE CONSUMER SURVEY Chart 4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-60

-40

-20

0

20

40

60

Consumer price inflation, HICPPerception of prices today relative to one year ago (right-hand axis)Price expectations for the coming year (right-hand axis)

Per cent, year-on-year Percentage balance

2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Source:

The percentage balance for households' perception of prices today relative to one year ago is calculated byassigning a weight of 100 to the responses much higher, 50 to the responses somewhat higher, 0 to the responses slightly higher, -50 to the responses unchanged and -100 to the responses slightly lower. The percentage balance for households' price expectations for the coming year is calculated by assigning a weight of 100 to the responses rises at a faster pace than now, 50 to the responses rises at the same pace as now, 0 to the responses rises at a slower pace than now, -50 to the responses remains unchanged and -100 to the responses falls slightly. The most recent observations are from May 2011. Statistics Denmark.


85

episode of rising inflation has also led to a marked increase in the indi-cator of household price expectations for the coming year.

We have conducted a simple empirical analysis to show the extent to which higher energy and food prices in Denmark are reflected in a sustained increase in overall consumer price inflation. Initially, an in-crease in energy and food prices causes consumer price inflation to rise, while core inflation remains unchanged, given that it is stripped of energy and food.

After one year, the initial (one-off) increases in energy and food prices will have no direct impact on annual consumer price inflation, which will equal core inflation.1 Moreover, if core inflation is not affected, HICP inflation will revert to its previous level after about one year. If com-modity-price increases still affect HICP inflation after one year, it must be because they raise core inflation through their impact on the prices of other goods. This impact may be related to higher wage demands driven by higher inflation expectations (second-round effects) or to higher production costs which are passed on to consumer prices with a time lag.

If core inflation increases in response to higher production costs that do not affect wage formation, the impact will be temporary. But if energy and food price inflation is incorporated into the economic system through second-round effects, this will provide a sustained lift to core inflation. The objective of the empirical analysis in Box 1 is to investigate whether consumer price inflation reverts to the initial level of core inflation after a period of high commodity-price increases or whether core inflation begins to rise.

On the basis of experience from the last decade, we find that increases in energy and food prices mainly have a temporary impact on consumer price inflation. After one year, consumer price inflation has more or less reverted to the initial level of core inflation, provided that energy and food prices have not increased further. There are also indications, how-ever, that core inflation is, to some extent, positively impacted by higher energy and food prices. The reason may be that higher energy prices cause firms' costs of production to rise, which can be expected to be passed on to consumer prices with a time lag. Furthermore, it may reflect that higher energy and food prices lead to higher wage growth. Based on this analysis, it cannot be determined which of these ex-planations is the more important.

1 We assume that, after the initial extraordinary one-off increase, commodity prices evolve roughly in

line with other prices.


86

CONCLUSION

Overall, the findings of this article indicate that an increase in inflation driven by higher energy and food prices tends to be of short duration

MODELS OF INFLATION DYNAMICS1 Box 1

If higher energy and food prices do not create a general increase in inflation, annual

consumer price inflation will revert to its previous level after one year. If the increases

continue to affect HICP inflation, this is through their impact on the prices of other

goods. To investigate whether this has been the case during the last decade, we

estimate the equation below on monthly Danish data for the period January 2000 –

January 2011:1

ttttt )( HICP12

core12

HICP12

HICP

HICPt and

coret are HICP and annual core inflation at time t. t is an error term, and

and are coefficients. A value of 0 indicates that consumer price inflation does

not tend towards the initial level of core inflation at all, while a value of 1 means

that consumer price inflation is fully adjusted towards one-year lagged core inflation.2

We get an estimate for of 1.12, which according to a statistical test is not

significantly different from 1. So there are indications that, after one year, consumer

price inflation reverts to the initial level of core inflation. Consequently, an increase in

energy and food prices does not result in a significant sustained increase in inflation.

We also consider a specification in which the change in core inflation is regressed

on the lagged difference between core inflation and consumer price inflation:

ttttt )( core12

HICP12

core12

core

Here a positive value of indicates that core inflation is affected by a preceding

increase in consumer price inflation. This may be interpreted as an indication that

second-round effects of higher commodity prices lead to an increase in inflation

expectations and, ultimately, to strengthening of the underlying inflation trend.

Moreover, core inflation has not been stripped of the indirect energy content. As pass-

through from commodity prices to consumer prices is typically lagged, this may cause

core inflation to be above its initial level after 12 months. The estimation of monthly

Danish data for the period January 2000 to January 2011 results in a point estimate

for of 0.46. This estimate is significantly different from both 0 and 1. So an increase

in energy and food prices will produce a rise in the prices of other consumer goods.

The period around 2008 stands out as energy prices surged, only to fall back quickly.

This period was marked by a sharp cyclical reversal, which may have contributed to

ensuring that inflation developments did not lead to higher wage demands.

Therefore we have performed a robustness check of the analysis in which the period

after December 2007 is excluded. This does not significantly affect the estimation

results.

1 The models comply with Cecchetti and Moessner (2008) and are estimated using autoregressive least squares. 2 The latter is conditional on α = 0, which cannot be rejected by a statistical test.


87

and that, accordingly, there are no signs of significant second-round ef-fects.

In the current situation, consumer price inflation is 3.1 per cent year-on-year, while core inflation is 1.7 per cent year-on-year. So the rela-tively high rate of consumer price inflation is attributable to higher energy and food prices and, based on the findings of the article, must be expected to decline within a short time frame. Moreover, there is currently spare capacity in the Danish economy, cf. Box 3, p. 33, which weakens domestic price and wage pressures. Therefore, the most likely outcome is that inflation will decline within the coming year, cf. the forecast for the Danish economy 2011-13, p. 41.

It should be noted that households' inflation expectations for the coming year have reached the high level of 2008, when commodity-price increases caused annual consumer price inflation to reach 4.8 per cent. It is a cause for concern if higher inflation expectations are reflected in higher wage demands. However, wage growth is low at present and current capacity pressures do not suggest that it will rise to a level that is incompatible with price stability. Against this backdrop, our assessment is that there is limited risk that the rise in energy and food prices will provide a sustained lift to inflation. This assessment is in line with the ECB's assessment of the conditions in the euro area.1

Nevertheless, central banks continue to monitor closely whether there are indications of second-round effects of the commodity-price rises and the ECB has emphasised its commitment to use interest-rate increases to consistently counter such trends.

1 See ECB (2011).


88

LITERATURE

Cecchetti, Stephen G. and Richhild Moessner (2008), Commodity prices and inflation dynamics, BIS Quarterly Review, December.

Statistics Denmark (2011), Danish input-output tables and analysis 2008.

ECB (2011), Interview with Jean-Claude Trichet, President of the ECB, conducted on 20 April 2011 by Mr Jorma Pöysä (Kauppalehti) and Mr Juhana Rossi (Helsingin Sanomat), 26 April.

Ministry of Finance (2009), Aftale mellem regeringen og Dansk Folke-parti om forårspakke 2.0 (Agreement between the Danish government and the Danish People's Party on Spring Package 2.0 – in Danish only), Schultz Grafisk A/S.

Hansen, Bo William and Dan Knudsen (2005), Domestic market-deter-mined inflation, Danmarks Nationalbank, Monetary Review, 4th Quarter.

Spange, Morten (2009), Price stability and employment, Danmarks Natio-nalbank, Monetary Review, 4th Quarter.


89

The Money and Foreign-Exchange Markets during the Financial Crisis

Anders Jørgensen, Market Operations, Carina Moselund Jensen, Paul Lassenius Kramp and Lars Risbjerg, Economics


The money market, comprising the market for interbank loans and short-term securities, played a central role during the financial turmoil which erupted in August 2007 and developed into an international financial and economic crisis following the suspension of payments by Lehman Brothers in September 2008. Part 2 of this Monetary Review contains a more detailed analysis of the money and foreign-exchange markets during the crisis.1 This article summarises the most important findings and experience.

The banks in a number of countries, including Denmark, were highly dependent on funding in the international money and capital markets. During the crisis, the banks in several countries became reluctant to lend to each other, and it became difficult for them to raise funding in the money market, especially in dollars. The money markets froze at the peak of the crisis in the autumn of 2008.

The crisis has shown that it is important for banks to structure their liquidity management so as to limit their dependence on funding in individual markets where liquidity can disappear very rapidly. Against this background, Danmarks Nationalbank and the Danish Financial Supervisory Authority have intensified the supervision of banks' liquidity management.

Central banks worldwide responded quickly and massively to the crisis, launching a number of extraordinary measures to support the banks' liquidity and access to funding. Danmarks Nationalbank provided dollar and euro loans to the banks via the foreign-exchange reserve and via swap lines with the Federal Reserve and the European Central Bank, ECB. According to our regression analyses, these measures substantially improved the liquidity conditions in foreign currency.

1 Cf. Carina Moselund Jensen, Anders Jørgensen, Paul Lassenius Kramp and Lars Risbjerg, The money

and foreign-exchange markets during the crisis, part 2 of this Monetary Review.,


90

The Danish money market in kroner was also affected. This was reflected e.g. in the Danish spread between uncollateralised and collateralised money-market interest rates, which widened considerably, as was the case in a number of countries. Our empirical analyses show that, at the beginning of the crisis, the Danish spread was driven mainly by liquidity conditions in the euro area. In the course of 2009 the spread came to predominantly imply a credit premium, reflecting that the crisis evolved from a liquidity crisis into a credit crisis.

On average, small banks paid a higher excess financing rate in the money market compared with large banks, and they had to increase the number of counterparties in order to obtain the necessary liquidity. Dan-marks Nationalbank established extraordinary liquidity facilities, but the extent of loans provided in that connection was very limited. Hence, Danmarks Nationalbank's provision of liquidity was predominantly allotted through the usual channels via the monetary-policy instruments, which proved to be robust and flexible in terms of ensuring the neces-sary liquidity for the banks.

The krone came under pressure when international investors withdrew from minor currencies in the autumn of 2008. In accordance with the fixed-exchange-rate policy Danmarks Nationalbank intervened massively in the foreign-exchange market in support of the krone, which re-mained stable against the euro during the crisis. At the peak of the crisis, it was impossible to substitute the outflow from the foreign-exchange reserve for government loans. The crisis thus showed that a large foreign-exchange reserve was needed for intervention in support of the krone, and Danmarks Nationalbank more than doubled the foreign-exchange reserve in relation to the situation before the crisis in the autumn of 2008. The crisis also showed that because banks are de-pendent on funding in foreign currency, Danmarks Nationalbank may need to provide foreign-currency loans out of the foreign-exchange reserve.

HOW DID THE CRISIS SPREAD TO DENMARK?

A key cause of the crisis was the market for mortgages to less credit-worthy American homeowners (the subprime market). Several US banks as well as banks in other countries had invested in assets exposed to the US housing market, which was suffering mounting losses. The assets were often complex financial instruments with opaque exposure. In add-ition to making the banks increasingly uncertain about their counter-parties' credit standings and their own liquidity situation, these condi-tions made them hesitant to grant credit in the money market. This was


91

reflected in a widening of the spread between uncollateralised and collateralised money-market interest rates, cf. the left-hand side of Chart 1. From the end of 2008 until the end of 2010, the Danish spread was wider than that of the euro area.

The crisis in the US market spread to the Danish market through the euro area. Our estimations in the article in Part 2 indicate that a large share of the Danish spread between uncollateralised and collateralised interest rates can be explained by the corresponding spread for the euro area, which mainly reflected a shortage of liquidity. However, in the course of 2009 the Danish spread came to predominantly imply a credit premium, i.e. a price for credit risk, cf. the right-hand side of Chart 1, reflecting that the crisis evolved from a liquidity crisis into a credit crisis. On the face of it, the wide credit-related spread was remarkable in view of Bank Rescue Package 1, which included a government guarantee for all deposits at banks from October 2008 to September 2010. A key explanatory factor is that most banks determined their credit policies as if Bank Rescue Package 1 did not exist. Furthermore, some market par-ticipants may have been uncertain about how fast they would be able to receive government funds if a counterparty failed. If the government was only able to honour claims with a certain lag, the failure of a counterparty might have lead to losses due to a shortage of liquidity.

Several banks in a number of countries were to a large extent funding themselves via short-term loans in foreign currency, especially dollars, in the international money markets. This is the key to understanding why the problems in the US mortgage market, which spread to the US money

SPREADS BETWEEN UNCOLLATERALISED AND COLLATERALISED INTEREST RATES IN SELECTED COUNTRIES AND FACTORS OF THE DANISH SPREAD Chart 1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Denmark Euro area USA UK Sweden

Percentage pointsInterest-rate spread

2007 2008 2009 2010 20110.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Credit premium, Denmark Liquidity premium, DenmarkSpread, euro area Actual spread

20102007 2008 2009

Percentage pointsFactors of the Danish spread

Note: Source:

Based on 3-month money-market interest rates. Left-hand side of the chart: Vertical lines are set at 9 August 2007 (the turmoil erupted when French bank BNP Paribas announced that it would stop paying instalments on its debt and calculating mark-to-market for three investment vehicles that were exposed to the subprime market) and 15September 2008 (Lehman Brothers suspended payments). Last observation: 31 May 2011. The right-hand Chart shows the result of a regression analysis in which the Danish spread is explained by the spread of the euro area andvariables for credit and liquidity risk premiums in the Danish market. Last observation: 1 June 2010. Own calculations based on data from Bloomberg and Reuters EcoWin.


92

market, rapidly developed into a global crisis. The backdrop for the rapid spreading of the crisis is that several large international banks that were central providers of credit across currencies were severely affected by the problems in the US housing market, so they generally put a stop to their international money-market lending. As the crisis evolved, it became more difficult and expensive to obtain dollars because the US banks became less willing to grant loans. They needed the dollar liquidity themselves and were concerned about the credit standings of the European banks. Consequently, there was a shortage of dollars in the sense that it became difficult for e.g. European banks to borrow dollars directly in the money market. They increasingly had to raise dollars in-directly by borrowing in other currencies, e.g. euro, and swapping to dollars via the FX swap market. This forced up the rate of interest on dollar funding via FX swaps considerably compared with the rate of interest on direct dollar loans, thereby creating large deviations from the covered interest-rate parity, cf. Chart 2.1 Similarly, there were devi-ations from the covered interest-rate parity between dollars and kroner and between euro and kroner.

1 The covered interest-rate parity indicates that the cost of borrowing directly in a currency, e.g.

dollars, is equivalent to the cost of raising a loan in another currency, e.g. kroner, while at the same time acquiring an FX swap from kroner into dollars. Large deviations from the covered interest-rate parity are indications of poorly functioning financial markets.

DEVIATION FROM THE COVERED INTEREST-RATE PARITY Chart 2

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Percentage points

Kroner/dollars Euro/dollars Kroner/euro

2006 2007 2008 2009 2010 2011

Note: Source:

Vertical lines are set at 9 August 2007 and 15 September 2008, cf. Chart 1. "Kroner/dollars" expresses the costs of borrowing in kroner combined with FX swaps to dollars less the costs of direct borrowing in dollars. The same applies to "Kroner/euro" and "Euro/dollars". Last observation: 31 May 2011. Bloomberg.


93

Danish banks' direct credit exposure to the US housing market was limited, but, like the banks in a number of other countries, they were exposed to the development in the international money markets due to their high dependence on short-term funding in foreign currency, parti-cularly dollars and euro, cf. the right-hand side of Chart 3. As foreign banks generally ceased to grant interbank loans in the autumn of 2008, the banks borrowed mostly from central banks instead, cf. the left-hand side of Chart 3.

WHAT DID DANMARKS NATIONALBANK DO TO ENSURE FUNDING IN FOREIGN CURRENCY?

In the autumn of 2008, against the backdrop of the shortage of dollars and euro, Danmarks Nationalbank, like some other central banks, estab-lished swap lines with the Federal Reserve, the Fed, and the ECB in order to be able to provide dollars and euro to Danish banks. Danmarks Natio-nalbank also provided dollar and euro FX swap loans from the foreign-exchange reserve in September and October 2008. Danmarks National-bank's swap lines with the Fed and the ECB substantially improved the conditions for funding in foreign currency. According to our empirical studies in the article in Part 2, the swap line with the Fed led to a re-duction in the deviation from the covered interest-rate parity between dollars and kroner totalling almost 70 basis points, while the swap line with the ECB reduced the deviation from the covered interest-rate parity between euro and kroner by just over 60 basis points. This reflects that market participants were reassured by the support of the Fed and the

THE BANKS' BORROWING IN THE MONEY AND CAPITAL MARKETS BROKEN DOWN BY FUNDING SOURCE AND CURRENCY Chart 3

0

100

200

300

400

500

600Kr. billion

400

600

800

1,000

1,200

1,400

1,600Kr. billion

Total (right-hand axis) Central banks Other MFIsShort-term debt Long-term debt

Breakdown by funding source

2003 2004 2005 2006 2007 2008 2009 20100

100

200

300

400

500

600Kr. billion

400

600

800

1,000

1,200

1,400

1,600Kr. billion

Total (right-hand axis) Dollars Euro Kroner Swiss francs

Breakdown by currency

2003 2004 2005 2006 2007 2008 2009 2010

Note: Source:

The compilation comprises Danish banks in the Danish Financial Supervisory Authority's groups 1 and 2,excluding their foreign branches and subsidiaries. Loans from MFIs constitute net borrowing from MFIs other than central banks and foreign branches and subsidiaries. Debt is debt securities issued. Short-term debt is issuance with an original maturity of less than 1 year, while long-term debt has a maturity of more than 1 year.Last observation: December 2010. Danmarks Nationalbank.


94

ECB for dollar and euro funding. The results are in line with similar studies for other countries.

Danmarks Nationalbank's euro loans from the foreign-exchange re-serve supported the conditions for funding in euro, while the effect of lending in dollars was less clear-cut. Part of the explanation is that lend-ing in euro amountwise far exceeded the dollar lending.

WHAT HAPPENED IN THE DANISH MONEY MARKET IN KRONER?

Thanks to the flexible structure of Danmarks Nationalbank's monetary-policy instruments, the Danish money market functioned comparatively well during the first part of the crisis.

Extraordinary facilities were introduced at a later stage. The extent of loans in that connection was very limited, but the measures were im-portant in order to ensure the banks' ability to meet the liquidity re-quirements under the Danish Financial Business Act.1

Turnover in the Danish money market fell, as in other countries, during the crisis. It became concentrated at the very short end of the market and switched from uncollateralised to collateralised lending as growing credit and liquidity risks kept banks from granting long-term uncollateralised loans. The short-term interbank market was partly re-placed by accounts with Danmarks Nationalbank, with banks increasing both their loans and deposits at Danmarks Nationalbank in the autumn of 2008, cf. Chart 4. The gross accumulation peaked in December 2008 when the banks and mortgage banks' holdings of certificates of deposit exceeded their net position vis-à-vis Danmarks Nationalbank by just over kr. 280 billion. Kr. 170 billion of this could be put down to the fact that some banks placed certificates of deposit while others raised monetary-policy loans. Hence, the increased gross positions vis-à-vis Danmarks Nationalbank to a large extent reflected that banks with a liquidity surplus placed it at Danmarks Nationalbank rather than relending it. Consequently, banks with a funding requirement had to raise monetary-policy loans rather than borrowing in the money market. As from October 2008, Bank Rescue Package 1 supported the interbank exchange of liquidity. The interest-rate margin between Danmarks Nationalbank's lending rate and the rate of interest on certificates of deposit, which was introduced in June 2009 to give the banks a greater incentive to even out mutual liquidity differences rather than using Danmarks Nationalbank's facilities, also contributed to reducing the banks' gross positions vis-à-vis Danmarks Nationalbank.

1 Cf. section 152 of the Danish Financial Business Act.


95

Some of the small and medium-sized banks in particular were affected by the problems in the money market. In the autumn of 2008, the small and medium-sized banks on average paid a substantial premium amounting to 0.25-0.5 percentage point on uncollateralised overnight loans, cf. the left-hand side of Chart 5. In a few instances for some banks the premium amounted to 2-3 percentage points. The small banks had to increase the number of loans and counterparties in order to ensure their funding, and they almost doubled the number of loans and coun-

THE LOANS AND DEPOSITS OF BANKS AND MORTGAGE BANKS VIS-À-VIS DANMARKS NATIONALBANK Chart 4

-400

-300

-200

-100

0

100

200

300

Monetary-policy loans Certificates of deposit Current-account deposits Net position

Kr. billion

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Note: Source:

Last observation: 30 December 2010. Danmarks Nationalbank.

SPREAD BETWEEN THE BANKS' DEPOSIT RATES AND THE NUMBER OF LOANS IN THE OVERNIGHT MARKET Chart 5

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

Medium-sized banks Small banks

Overnight spread to large banks

2006 2007 2008 2009 2010

Percentage points

0

5

10

15

20

25

30Number

Large Medium-sized Small

Number of banks' loans

2006 2007 2008 2009 2010

Note: Source:

The vertical lines are set at 9 August 2007 and 15 September 2008, cf. Chart 1. Large, medium-sized and small banks refer to the Danish Financial Supervisory Authority's groups 1, 2 and 3. 21-day moving averages. Last observation: 30 September 2010. Danmarks Nationalbank.


96

terparties in connection with the onset of the turmoil in the summer of 2007, cf. the right-hand side of Chart 5.

WHAT HAPPENED IN THE FOREIGN-EXCHANGE MARKETS AND TO THE DANISH KRONE?

The krone came under pressure when international investors withdrew from minor currencies in the autumn of 2008. The shortage of foreign currency also contributed to the pressure on the krone, as some in-vestors repaid their loans in foreign currency rather than renewing them and funded themselves in kroner instead. This increased the demand for foreign currency in relation to kroner. Furthermore, there were indi-cations of some investors speculating in Danmarks Nationalbank not being able to maintain the fixed-exchange-rate policy. As a result of the Danish fixed-exchange-rate policy against the euro, Danmarks National-bank made intervention purchases for considerable amounts, cf. Chart 6, and raised its monetary-policy interest rates in a time where other central banks generally lowered theirs. The transmission from monetary-policy interest rates to the exchange rate of the krone lost considerable momentum, making it impossible to immediately substitute the outflow from the foreign-exchange reserve for government currency loans at the peak of the crisis.

THE KRONE RATE AGAINST THE EURO AND INTERVENTION PURCHASES Chart 6

7.25

7.30

7.35

7.40

7.45

7.50

7.55

7.60

7.65 -15

-10

-5

0

5

10

15

20

25

Intervention purchases (right-hand axis) Market rateCentral rate Band limits (+/- 2.25 per cent)

Kroner per euro Kr. billion

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: Source:

Central rate and band limits in ERMII. Inverted scale on the left-hand axis. Daily interventions. Last observation: 30 December 2009. Danmarks Nationalbank.


97

Danmarks Nationalbank's measures contributed to stabilising the krone. The issuance of 30-year government bonds, which were in high demand from the Danish pension sector, and Bank Rescue Package 1 also con-tributed to stabilising the situation.1 During the crisis the krone re-mained stable at a level close to its central rate against the euro.

CONCLUSION: EXPERIENCE FROM THE CRISIS

The crisis has shown that it is important for banks to structure their liquidity management so as to limit their dependence on individual mar-kets where liquidity can disappear very rapidly. Against this background, Danmarks Nationalbank and the Danish Financial Supervisory Authority have intensified their supervision of the banks' liquidity.

The crisis led to a widening of the spread between uncollateralised and collateralised Danish money-market interest rates. The Danish spread at the beginning of the crisis was driven mainly by liquidity con-ditions in the euro area. In the course of 2009 the spread came to predominantly imply a credit premium, reflecting that the crisis evolved from a liquidity crisis into a credit crisis.

Another sign of crisis was that banks and mortgage banks with a liquidity surplus increasingly chose to place it at Danmarks Nationalbank rather than relending it. Consequently, banks with a funding require-ment had to borrow from Danmarks Nationalbank rather than bor-rowing in the money market. At the end of 2008, the banks' failure to exchange liquidity in the money market was reflected in the fact that the banks overall borrowed and placed liquidity at Danmarks National-bank amounting to almost kr. 280 billion. This gross accumulation was subsequently reduced. A contributory factor was Danmarks National-bank's introduction in June 2009 of a margin between the lending rate and the rate of interest on certificates of deposit.

Some of the small banks in particular were affected by the problems in the money market. Compared with the large banks, at the end of 2008 the small banks on average paid a premium of 0.25-0.5 percentage point for loans in the overnight money market, which is fundamental to the banks' ongoing liquidity management. In a few instances for some banks the premium amounted to 2-3 percentage points. The small banks doubled the number of counterparties. They had to increase the number of counterparties in order to ensure their liquidity.

1 The issuance of 30-year government bonds supported the demand for kroner to the extent the

pension sector sold European bonds to buy Danish government securities.


98

The structure of Danmarks Nationalbank's monetary-policy instruments proved to be robust during the crisis and did not require adjustment. The open window in Danmarks Nationalbank's open market operations, which makes it possible for the banks to obtain the necessary volume of loans, the broad access to the instruments and the depth of collateral gave the banks a high degree of flexibility in terms of obtaining the liquidity they demanded.

The crisis revealed that if the krone is under pressure, larger amounts may be needed for intervention purposes than warranted by previous experience. Danmarks Nationalbank more than doubled the foreign-exchange reserve in relation to the situation before the pressure on the krone really set in.

The banks' dependence on funding in dollars and euro also showed that it may become necessary for Danmarks Nationalbank to provide loans in foreign currency from the foreign-exchange reserve.

During the crisis, however, Danmarks Nationalbank primarily provided loans in foreign currency via swap lines with the Fed and the ECB and only to a limited extent from the foreign-exchange reserve. The regres-sion analyses illustrate the efficiency of those swap lines in terms of improving liquidity conditions in dollars and euro. This reflects that mar-ket participants were reassured by the support of the Fed and the ECB for dollar and euro funding. The swap lines reduced the deviation from the covered interest-rate parity between kroner and dollars by 70 basis points, while the reduction of the deviation from the covered interest-rate parity between kroner and euro amounted to around 60 basis points. The results are in line with similar studies for other countries.


99

Settlement Times for Payments in Denmark

Jesper Bakkegaard, Tommy Meng Gladov and Anders Mølgaard Pedersen, Payment Systems


When citizens in Denmark pay with their Dankort debit cards or transfer money via online banking services, the banks have to book the trans-actions to the customer accounts and exchange funds. Unlike cash pay-ments, these payments are therefore subject to a certain settlement time, depending on the set-up of the payment system. Today, it usually takes at least one day to execute a Dankort payment or an online bank transfer.

Settlement times for payments of one or more days are not contem-porary given that it is now common to exchange data in real time via computers and mobile phones. Moreover, there is a risk that such a long settlement time will make it more difficult to introduce new efficient payment instruments, e.g. money transfers via mobile phones, which require fast settlement if the customers are to benefit fully.

In several countries, with which Denmark is often compared, national payment systems have been restructured in recent years, reducing settle-ment times for payments. Typically, it is now possible to settle payments intraday in these countries – and in some instances even in real time – even if the payer and the payee have different banks.

In 2009, a working group chaired by Danmarks Nationalbank analysed settlement times for payments in Denmark. This was prompted by a re-quest by the Minister for Economic and Business Affairs, who had been called on by the Folketing (Danish parliament) to examine why settle-ment times were longer in Denmark than in the Netherlands and the UK. The outcome was a report with recommendations that could lead to faster payment settlement.

The Danish Bankers Association, the trade organisation for banks, has subsequently assessed that the costs of changing the infrastructure according to the recommendations would not match the gains for the customers. Consequently, Danmarks Nationalbank has decided that the working group will continue and prepare a basis for decision with specific measures to reduce settlement times for payments in Denmark by year-end.


100

PAYMENT SETTLEMENT IN DENMARK

When a consumer in Denmark pays a bill by making an online bank transfer, the process includes the following steps, cf. Chart 1: 1. Payment is made. In his/her online banking service, the consumer –

the payer – enters the payee's account number and, if relevant, a payment date. If it is an inpayment form, the payer has to enter a code indentifying the payment instead of an account number. Finally, the payer must typically confirm the transfer with a personal code.

2. The amount is debited to the payer's account. If the transfer is made on a banking day, such as a Tuesday as in Chart 1, the amount is debited immediately after the payer has confirmed the transfer. The payer's bank will, in practice, transfer the amount withdrawn to a special account, an intermediate account, which the payer cannot operate.

3. The amount is transferred from the payer's to the payee's bank. This is carried out in the Sumclearing payment system, cf. Box 1. Here the daily payments are collected before money is exchanged among the banks during the night. The amount of a payment made on Tuesday will thus be transferred from the payer's to the payee's bank during the night between Tuesday and Wednesday.

4. The amount is credited to the payee's account. This is effected in the morning after the money has been transferred to the payee's bank in the nightly settlement. The amount from an online bank transfer made on Tuesday will therefore be credited to the payee's account on Wednesday. The money is then available to the payee, and the payment is completed.

ONLINE BANK TRANSFER IN DENMARK, STEP BY STEP Chart 1

Tuesday

Exchange of amount in the Sumclearing via accounts with

DanmarksNationalbank

1: Payer makes an online transfer onTuesday

4: The amount is creditedto the payee’s accounton Wednesdaymorning and is nowavailable to the payee

2: The amount is immediatelydebited to the payer’s account

3: The payment is transferred overnightfrom the payer’s to the payee’s bank

Payer’s bank Payee’s bank

Wednesday

Note: Source:

The payment is assumed to be made Tuesday before 6 p.m., which is the earliest cut-off time for online bank transfers for settlement during the night between Tuesday and Wednesday. Danmarks Nationalbank.


101

The exchange of money among the banks in the Sumclearing is effected via accounts with Danmarks Nationalbank. This reduces the overall risks associated with the settlement of payments and complies with inter-

THE SUMCLEARING Box 1

The Sumclearing is the Danish system for settling payments as card payments, credit transfers and transfers via Betalingsservice (direct debit). The system is owned by the Danish Bankers Association, while Nets (previously PBS) is operating the system. At

end-2010, the Sumclearing had 133 participants, all of which were banks. Some of them participated indirectly by having the money exchanged via another bank.

In the Sumclearing, payments are collected in two separate processes, called

subclearings. One of them, the electronic clearing, is performed decentrally at the banks and comprises payments made by the banks' own customers, e.g. credit

transfers, including online bank transfers, settlement of inpayment forms, cash

withdrawals from ATMs and cheque payments. In the second subclearing, the PBS clearing, the payments are collected centrally at

Nets. It comprises payments via Nets' own products and other payments handled by

Nets. These are primarily Dankort payments, transfers via Betalingsservice, LeverandørService (supplier service) and Overførselsservice (transfer service) as well as

payments using international payment cards. At the end of the day, the banks' mutual payment obligations are calculated; first

the electronic clearing and the PBS clearing separately and subsequently the two subclearings together. Thus, each bank ends up with an amount that it must either

give to or receive from all other banks. This is the individual bank's net position in the Sumclearing.

The exchange of net positions between the banks takes place via accounts with

Danmarks Nationalbank. As a main rule, this is executed in one combined settlement at 1.30 a.m. Before then, the banks have reserved money for the settlement, possibly

by using their credit facilities with Danmarks Nationalbank, either as monetary-policy

loans or intraday loans, against collateral. Table 1 shows the number and value of the payments settled in the Sumclearing in

2010. Dankort payments accounted for the largest number, while credit transfers and

payments via inpayment forms accounted for the highest value. This partly covers government payments such as block grants to the municipalities and VAT payments

from the corporate sector.

PAYMENTS SETTLED IN THE SUMCLEARING IN 2010 Table 1

Number (million) Value (kr. billion)

Dankort, VisaDankort and cash cards ......... 938.4 329.3 Betalingsservice and LeverandørService ..... 188.1 591.2 International payment cards ....................... 185.8 71.9 Credit transfers ............................................ 175.1 3,241.4 Inpayment forms .......................................... 114.9 1,161.6 Cheques ........................................................ 5.2 131.8

Total .............................................................. 1,607.5 5,527.3

Source: Danish Bankers Association and Nets.


102

national standards. Danmarks Nationalbank has the same role in secur-ities settlement in Denmark.

If the payer and the payee are customers of the same bank, the third step will obviously not exist. In that case, the bank will normally debit the money to the payer's account and credit it to the payee's account immediately, meaning that the transfer is settled instantly. In the follow-ing, the payer and the payee are assumed to have different banks.

If an online bank transfer is to be settled during the night, it must be made before a specific cut-off time, which is between 6 p.m. and 9 p.m., depending on the payer's bank. A transfer executed on Tuesday at 10 p.m. will thus be debited to the payer's account on Wednesday, settled during the night between Wednesday and Thursday and credited to the payee's account on Thursday.

In connection with weekends, the settlement time is longer than one day, cf. Chart 2. A transfer made on Friday before 6 p.m. will be debited to the payer's account on the same day and settled in the Sumclearing during the night between Friday and Saturday. However, the amount will not be credited to the payee's account until Monday, which gives a settlement time of 3 days.

If the transfer is made on Friday after 9 p.m., Saturday or Sunday, the money will typically be debited to the payer's account on Monday. The amount will subsequently be exchanged between the payer's and the

ONLINE BANK TRANSFERS IN CONNECTION WITH A WEEKEND Chart 2

Friday

(1)

Before6 p.m.

6-9p.m.

After9 p.m.

Exchange of amount in the Sumclearing

Saturday Sunday Monday Tuesday

Payer’sbank

Payee’sbank

Payer’sbank

Payee’sbank

(2)(3)

(4)

(1)

(2)

(4)Exchange of

amount in the Sumclearing

(3)

Note: Source:

(1) The payer makes an online bank transfer, (2) the payer's bank debits the amount to the payer's account, (3)the banks exchange the amount in the Sumclearing via their accounts with Danmarks Nationalbank, and (4) the amount is credited to the payee's account. Danmarks Nationalbank.


103

payee's bank in the night between Monday and Tuesday and credited to the payee's account on Tuesday. In that case, the settlement time is 2-4 days.

Public holidays further extend the settlement time for online bank transfers. Thus, a transfer made on Wednesday before Maundy Thursday after 9 p.m. will be debited to the payer's account on Tuesday after Easter Monday, settled via the Sumclearing during the night between Tuesday and Wednesday and credited to the payee's account on Wednesday. This results in a 7-day settlement time.

Table 2 presents an overview of settlement times for online bank transfers made on each day of the week and selected public holidays.

For Dankort payments the current process is basically the same as outlined above. If a customer pays with a Dankort debit card in a shop on Tuesday before midnight, the amount will be debited to the customer's bank account on the same day. It will then be included in the nightly settlement and be credited to the shop's bank account on Wednesday.

The procedures for booking Dankort payments were changed in the autumn of 2009. Previously, the money was not debited to the cus-tomer's account until the day after the payment had been made, which would be Wednesday if payment had been effected on Tuesday. The

SETTLEMENT TIMES FOR ONLINE BANK TRANSFERS Table 2

Before cut-off time After cut-off time

Transfer settled

Amount debited

Amount credited

Settle-ment time

(days)

Amount debited

Amount credited

Settle- ment time

(days)

Monday ........................................... Mon Tue 1 Tue Wed 2 Tuesday ........................................... Tue Wed 1 Wed Thu 2 Wednesday ...................................... Wed Thu 1 Thu Fri 2 Thursday........................................... Thu Fri 1 Fri Mon 4 Friday ............................................... Fri Mon 3 Mon Tue 4 Saturday .......................................... Mon Tue 3 Mon Tue 3 Sunday ............................................. Mon Tue 2 Mon Tue 2 ------------------------------------------------------------------------------------------------------------------------

Thu before General Prayer Day ..... Thu Mon 4 Mon Tue 5 Wed before Maundy Thursday ...... Wed Tue 6 Tue Wed 7 Wed before Ascension Day ............ Wed Mon 5 Mon Tue 6 Fri before Whitsun .......................... Fri Tue 4 Tue Wed 5

Note: The table indicates when the amount is debited to the payer's account and credited to the payee's account as well as the settlement time for online bank transfers made on various days, including in connection with selectedpublic holidays. The cut-off time may vary between 6 p.m. and 9 p.m., depending on the payer's bank. OnSaturdays and Sundays, the transfer time is irrelevant, as the payment is usually debited to the payer's accounton Monday and credited to the payee's account on Tuesday. The settlement time for transfers made inconnection with Ascension Day and Whitsun can be further extended if Constitution Day falls on a weekday around these public holidays.



104

changes should be viewed in light of the new rules on accrual of interest in connection with payments, see below. Accrual of interest Payment settlement times influence the customers' loss of interest in-come on the amount transferred. In Denmark, the banks' accrual of interest on payments is laid down in the Payment Services Act, which entered into force on 1 November 2009, implementing the Payment Services Directive.1 Until then, no Danish legislation existed in this area.

According to the provisions of the Act, the payer's bank may not cease to add interest until the day on which the money is debited to the payer's account, cf. Chart 3. Likewise, the payee's bank must begin to add interest no later than on the day when it receives the money and usually will credit it to the payee's account.

If, as shown in Chart 3, the money is debited to the payer's account on Tuesday, the payer's bank will thus have to add interest until Tuesday. Similarly, the payee's bank, which receives the money on Wednesday, must begin to add interest no later than Wednesday. However, neither of these two banks needs to add interest to the customer's accounts from Tuesday to Wednesday.

These provisions limit the number of days when the customers forego interest due to payment transactions. In practice, the customers will only lose interest income for the period from the amount is debited to the payer's account until it is credited to the payee's account. As appears from Table 2, this period will usually be one day, unless payment is made late on Thursday, Friday before the cut-off time or before public holidays in which case it may be several days.

The loss of interest can be viewed as a loss for the payee. If, for example, goods are purchased using a Dankort on Tuesday, the cus-tomer will receive interest until this day. However, the shop does not receive its money and receive interest until Wednesday, the day after the goods have been sold.

The example with a Dankort payment on a Tuesday also illustrates what would have happened, had the booking of these payments not been changed in the autumn of 2009. Previously, the money in such a payment was not debited to the payer's account until Wednesday, but the bank usually ceased to add interest already on Tuesday.

Without changing the booking of Dankort payments, the payer's bank, according to the new provisions, would have had to add interest

1 See Anders Mølgaard Pedersen, The directive on payment services, Danmarks Nationalbank,

Monetary Review, 3rd Quarter 2007.


105

until Wednesday, the day when the amount was debited. As the payee's bank has to add interest from the same day, the customers would thus no longer forego one day's interest. PAYMENT SETTLEMENT IN OTHER COUNTRIES

Over the past years, a number of countries have restructured their pay-ment systems – or specifically plan to do so – with a view to reducing settlement times for payments. In several of these countries, such as Norway, Sweden, the Netherlands and the UK, intraday completion of payments is now possible, cf. Table 3. Norway For several years, it has been possible to execute e.g. online bank transfers and card payments intraday. The payments are settled in the NICS system, which calculates the banks' mutual obligations three times daily. The banks subsequently exchange money via accounts with the central bank, Norges Bank, before they immediately make entries to the customers' accounts.

The settlement time for a payment depends on which time of the day it is made. In the daytime, the amount is typically credited to the payee's

PROVISIONS ON ACCRUAL OF INTEREST IN THE PAYMENT SERVICES ACT Chart 3

Payee’s bank must addinterest no later than from the day when it receives the money

Payer’s bank must addinterest until the payment is debited to the payer’saccount

Tuesday Wednesday

Payee’s bank must addinterest no later than from the day when it receives the money

Payer’s bank must addinterest until the payment is debited to the payer’saccount

Tuesday Wednesday


OVERVIEW OF THE PAYMENT SYSTEMS OF SELECTED COUNTRIES Table 3

Can payments be settled intraday?

Payment types that can be settled

intraday

Entry to customer accounts before

settlement

Norway ........................................ Yes All No Sweden ........................................ Yes Online bank transfers No Netherlands ................................. Yes All No United Kingdom ......................... Yes Online bank transfers Yes Denmark ...................................... No None No

Note: The Table shows whether the national systems for settlement of consumers' payments – in Denmark the Sumclearing – provide scope for intraday settlement. The Swedish banking sector currently works on developinga new system for settling e.g. online bank transfers, so that they can be settled immediately.



106

account within 3 or 4 hours. The banking sector, which owns NICS, is considering introducing an extra daily settlement, thus reducing the settlement time further. Sweden Consumers can make online bank transfers intraday via the Data Clearing System, which calculates the banks' net obligations four times daily. As in Norway, money is exchanged at the central bank, Sveriges Riksbank, and the banks make entries to customer accounts imme-diately.

The banking sector is currently working on developing a new system for e.g. online bank transfers. This is inspired by the UK Faster Payments Service, see below, and will make it possible to make transfers that are received by the payee few seconds after – 24 hours a day, seven days a week.

Card payments are not settled in the Data Clearing System, but in systems owned by card companies, such as Visa and Mastercard. Settle-ment of these payments usually takes at least one day, and as in Den-mark, it may take several days if the payments are made in connection with weekends and public holidays. The Netherlands In the Netherlands, payments are settled even faster than in Norway and Sweden. In the Dutch payment system, the banks' net positions are cal-culated every 30 minutes, and the amounts are exchanged on accounts in the Dutch central bank, De Nederlandsche Bank. As soon as the banks receive the necessary payment information, they book the customer accounts.

The Dutch banking industry is characterised by a high concentration ratio, since three banks account for almost all payments. Therefore, a relative large part of the payments in the Netherlands are between customers within the same bank. Such payments can be executed direct-ly in the banks' accounting systems and thus immediately. UK Since May 2008, British citizens have been able to make credit transfers via the Faster Payment Service. The system is open 24 hours a day, seven days a week and guarantees that the payments are executed within two hours. In practice, this happens for most payments immediately, which is possible since the payments enter customer accounts before settlement.

However, this involves settlement risk, since the payee's bank has not yet received the payment amount from the payer's bank. Therefore, the


107

banks have implemented measures that reduce the risk and moreover, the banks' net positions are settled three times a day on accounts in the British central bank, Bank of England.

The Faster Payment Service does not handle card payments, which – as in Sweden – are settled in the card companies' own systems. A card pay-ment in the United Kingdom is normally on the way for two or three days before it enters the payee's account.

WORKING GROUP ON NATIONAL PAYMENTS

In 2009, the Minister for Economic and Business Affairs asked Danmarks Nationalbank to chair a working group with the purpose of analysing settlement times for payments in Denmark. In connection with the reading of the Payment Services Act, the Folketing called for an examin-ation of the reasons why settlement times are longer than in the Nether-lands and the UK.

Danmarks Nationalbank set up a working group consisting of stake-holders in the Danish payments infrastructure. The working group's mandate was to indentify the measures required for intraday comple-tion of national payments. Furthermore, it was to assess the pros and cons of shorter settlement times.

In January 2010, the working group published a report, which recom-mended examination of how to reschedule and hence speed up settle-ment of payments in connection with weekends and public holidays and how to introduce an extra daily settlement of credit transfers, including online bank payments.

Moreover, the working group recommended examination of whether it was possible to postpone the banks' cut-off time for payments to be settled in that same night. This would allow more payments made during the evening to be included in the nightly settlement and be credited to the payee's account the following day.

The Danish Bankers Association has subsequently assessed the conse-quences of implementing the recommendations set out in the report and has concluded that – except for postponement of the cut-off time, which will not involve significant costs – the costs of changing the pay-ments infrastructure will not match the gains for the customers.

Therefore, Danmarks Nationalbank does not consider the assignment of the working group to be completed. At the same time, developments in other countries have shown that there is a need to consider other models that could result in faster payment settlement. Danmarks Nationalbank has therefore informed the Ministry of Economic and Business Affairs that the working group will continue.


108

Against this background, Danmarks Nationalbank has summoned the working group to new meetings. At first, it will prepare a basis for decision with specific measures to reduce the settlement time for pay-ments in Denmark as well as a time schedule. This work is intended to be completed by end-2011.


109

The 50-Year History of the Monetary Review

Kim Abildgren, Economics


The Monetary Review is a key instrument in the communication of Danmarks Nationalbank's monetary and exchange-rate policies to the public. Furthermore, the publication plays an important role as a forum for voicing Danmarks Nationalbank's views on the areas of economic policy that play a key role in the conduct of monetary and exchange-rate policies or in the stability of the financial system.

The first Monetary Review was issued in May 1962, so in 2011 the publication has entered its 50th year. This article summarises the sub-stantial changes of the presentation and content of the Monetary Review over time.

The Monetary Review published by Danmarks Nationalbank today is considerably more informative than its ancestor 50 years ago. This re-flects a trend towards greater transparency in monetary and exchange-rate policies that has characterised central banks worldwide over the last couple of decades.

ORIGINS AND OBJECTIVE OF THE MONETARY REVIEW

Preparations for a new publication series, a Monetary Review, began in 1961. One source of inspiration was the UK, where the Bank of England had introduced a Quarterly Bulletin in 1960, containing statistics as well as descriptions of economic developments and more analytical articles, cf. Windram and Footman (2010). Moreover, Danmarks Nationalbank regularly received enquiries from abroad about money and credit in Denmark.

An internal memo from November 1961 stored in Danmarks National-bank's archives states that the objective of publishing a monetary review should be:

"... to create better knowledge of developments within areas that are directly linked to Danmarks Nationalbank's activities, i.e. money and credit, interest-rate developments,


110

the situation in the financial markets, the foreign-exchange position, etc. This would be in line with recent years' devel-opments both at home and abroad towards providing better information and information to more people about economic conditions".

As regards the content of the publication, the memo states the fol-lowing:

"In addition to the tables section, a general overview could be provided by way of introduction; it should presumably mainly be descriptive, but could, in certain situations, con-tain assessments. Furthermore, a monetary review could be used to disseminate information of a more special character, e.g. about Danmarks Nationalbank's communication to com-mercial banks and savings banks, about legislation and regu-lations governing the activities of banking institutions, about legislation and regulations governing foreign-ex-change conditions, etc. ... Other options could include repro-duction (possibly as appendices) of various works by Dan-marks Nationalbank, e.g. ... publication of speeches by the governors of Danmarks Nationalbank".

To a large extent, the objectives for the publication formulated in 1961 and the reflections on its content that were made at the time still apply to the present-day Monetary Review. One of the reasons is that the plans launched in 1961 were rather ambitious and it would take some years to realise them.

THE FIRST COUPLE OF DECADES

The first issue of Danmarks Nationalbank's Monetary Review came out in May 1962. It was published in English only – under the title that has remained unchanged to this day. The publication simply contained a collection of statistical tables and charts to illustrate recent develop-ments in monetary and credit conditions in Denmark – without any ex-planatory text.

In November 1970, the Monetary Review was expanded to include two pages of text describing "recent trends in external finance and domestic credit". These pages were also translated into Danish.

At a meeting of the Board of Directors of Danmarks Nationalbank in March 1971, a request was put forward for a Danish-language version of


111

the whole publication, reflecting a wish from a member of the Finance Committee of the Folketing (Danish parliament). The issue was also raised at a meeting of Danmarks Nationalbank's Committee of Directors in April 1972, and in November 1972 a pure Danish version was pub-lished under the name of "Kvartalsoversigt".

The section on "recent trends in external finance and domestic credit" grew over the years, but was still only about five pages long by the mid-1980s. And unlike the publications of many other central banks, Dan-marks Nationalbank's Monetary Review did not contain articles of a more analytical nature.

CRITICISM FROM THE "WISE MEN" AND A HIGHER INFORMATION CONTENT

Towards the end of 1984, a majority of the Political and Economic Affairs Committee of the Folketing requested that the Chairmanship of the Economic Council prepared a report of monetary and credit policies in Denmark. In the report from the Chairmanship's "wise men", pub-lished in September 1985, the information activities of Danmarks Natio-nalbank were criticised:

"Contrary to the practice of most other central banks, the quarterly publication does not include analyses and reviews by the bank's employees, and only in exceptional cases are such articles published elsewhere. ... All in all, information activities in relation to Danish monetary and exchange-rate policies do not seem to have kept up with developments abroad ..." (Translated quotation from p. 222 of The Economic Council, Chairmanship (1985)).

To accommodate this wish for more information from Danmarks Natio-nalbank, a section with articles was added to the Monetary Review in May 1986:

"In the report of the Chairmanship of the Council of Economic Advisers ... it is pointed out that the decision-making process concerning questions of monetary policy has been too exclusive, and that the Nationalbank has not to a sufficient degree contributed to public debate on matters of monetary and foreign-exchange policy. In order to accom-modate this wish, the Nationalbank has expanded the Monetary Review with articles on issues of monetary and


112

foreign-exchange policy." (Quotation from p. 1 of Hoff-meyer (1986)).

Since the mid-1980s, this section has seen the publication of some 375 signed articles on monetary, credit and exchange-rate conditions, fi-nancial markets, banks and financial stability, etc., cf. Chart 1.

CONCLUDING REMARKS

In line with trends in other parts of society, central banks have in recent decades tended to provide more information about their tasks, object-ives and decisions. The increased communication with the outside world takes several forms, e.g. websites, speeches and reports, cf. Storgaard (2002).

Over time the Monetary Review has undergone substantial change, not least in recent years. In 2007 it was expanded to include the eco-nomic forecasts previously prepared for internal use by Danmarks Nationalbank. Most recently, in 2011, Danmarks Nationalbank has intro-duced a supplementary volume, "Part 2", to the Monetary Review with longer, in-depth analyses of Danish and international economic issues of particular relevance to Danmarks Nationalbank.

SIGNED ARTICLES IN THE MONETARY REVIEW 1986-2011 Chart 1

0

10

20

30

40

50

60

70

80

90

Mo

ney

, cre

dit

,fo

reig

n-e

xch

ang

e

Fin

anci

al m

arke

ts

Ban

ks a

nd

fin

anci

al s

tab

ility

Gro

wth

an

dec

on

om

ic c

ycle

s

EMU

Paym

ent

syst

ems

and

fin

anci

alin

fras

tru

ctu

re

Wag

es, p

rice

s an

dco

mp

etit

iven

ess

Pub

lic f

inan

ces

IMF

Bal

ance

of

pay

men

ts a

nd

dir

ect

inve

stm

ent

Number

Note: Source:

Monetary Reviews from May 1986 up to and including the 2nd quarter of 2011 have been included. The numberof signed articles in the Monetary Review includes articles by external contributors, but not speeches andreproductions of articles published elsewhere. Danmarks Nationalbank.


113

The ongoing development of the publication aims to ensure that it remains an efficient channel for Danmarks Nationalbank's external com-munication. Let us hope that the Monetary Review will still be an im-portant source of insight into economic and monetary developments and Danmarks Nationalbank's deliberations on core issues relating to the performance of its tasks for many years to come. LITERATURE

The Economic Council, Chairmanship (1985), Dansk pengepolitik under forvandling – En strukturrapport udarbejdet efter anmodning fra folke-tingets politisk-økonomiske udvalg (Danish monetary policy in transition – A structural report prepared at the request of the Political and Eco-nomic Affairs Committee of the Folketing – in Danish only), Akademisk Forlag.

Hoffmeyer, Erik (1986), Introduction, Danmarks Nationalbank, Monetary Review, May.

Storgaard, Peter Ejler (2002), Exchange-Rate Regimes and Transparency, Danmarks Nationalbank, Monetary Review, 3rd Quarter.

Windram, Richard and John Footman (2010), The history of the Quar-terly Bulletin, Bank of England Quarterly Bulletin, 4th Quarter.


115

Speech by Nils Bernstein at the Annual Meeting of the Danish Mortgage Banks' Federation 30 March 2011

Growth in the global economy has accelerated over the last year and has become more robust. But recent events have, once again, shown how unpredictable the world is. The turmoil in the Middle East – with an armed conflict in Libya – and the natural disaster in Japan with its alarm-ing consequences will not halt the global economic upswing, but they will have an impact.

Combined with a number of other factors, the upswing has contrib-uted to a global price hike. Inflation is driven by rising food and com-modity prices. Commodity prices are now almost back at the high level seen before the financial crisis. It looks as if the crisis just led to a short interruption of an upward underlying trend in commodity prices.

With higher inflation, the level of interest rates is likely to normalise sooner than the markets have previously expected. The anchoring of inflation expectations is important if the higher prices are not to spill over to wages and trigger a price-wage spiral. The European Central Bank has stressed its commitment to keeping inflation at bay, and there is reason to believe that an undesirable price-wage spiral can be avoided, as long as there is plenty of spare capacity and labour. The financial crisis and not least the European sovereign debt crisis have clearly shown that there is a need for stronger economic cooperation in the EU. And so far the EU has been ready to respond to this need. The first important step was taken in the autumn, when the Commission and the Van Rompuy task force presented their proposals for strengthening the Stability and Growth Pact and other aspects of economic coopera-tion. The member states have now agreed on a series of amendments to strengthen fiscal discipline and – as a new element – introduce a surveil-lance mechanism to prevent fundamental macroeconomic imbalances in EU member states, including those outside the euro area.

The second important step was taken on 11 March, when the heads of state or government of the euro area member states agreed on the Euro Pact. The pact is first and foremost a strong political signal of shared determination to introduce initiatives to strengthen competitiveness, employment, fiscal discipline and financial stability. As a non-euro area member state, Denmark did not have to join the Pact. At Danmarks Na-


116

tionalbank we are pleased to note that there was broad support for doing so in the Danish parliament, Folketinget. But I should add that words must always be followed by action if the Pact is to have any value.

The third important step is the agreement to establish a permanent crisis resolution mechanism – the European Stability Mechanism, ESM. This debt-financing mechanism is to be established for euro area mem-ber states from mid-2013 and will replace the temporary financing mechanism for euro area member states in sovereign debt difficulties. Together with IMF funding and possibly bilateral contributions, the ESM will help to ensure adequate responses to future sovereign debt crises. An important element of the plan is that the ESM will offer loans only if macroeconomic stabilisation programmes are implemented at the same time, imposing stringent economic policy obligations on the recipient member state.

Danmarks Nationalbank welcomes these improvements of the frame-work for economic cooperation. Since our currency is closely tied to the euro, Denmark will benefit from operating within the same overall eco-nomic framework as the euro area member states, thereby contributing to robust economic cooperation in the EU. But the strength of the coop-eration can only be put to the test in practice.

The need for stronger economic cooperation is reflected in the differ-ent economic situations of the individual EU member states at present.

The best-performing member states are characterised by a long period of moderate wage inflation relative to productivity developments, as well as balanced public finances. Germany and Sweden are cases in point. It is also worth noting that these two member states did not have housing bubbles that burst.

At the opposite end of the scale we find a group of member states with large sovereign debt problems and sagging competitiveness. Their large government budget deficits and external deficits as well as their high government debts reflect that consumption and investment have been exceeding output for a long time. This can continue for a while, but naturally it is not sustainable in the long run. Consumption and in-vestment have been driven by factors such as rapidly rising house prices that subsequently plummeted.

Denmark is probably somewhere in between these two extremes. For the last 5-6 years, the Danish economy has seen an excessive boom

followed by a deep recession that we are only slowly working our way out of.

In the wake of the crisis, the private sector has been consolidating strongly. Corporate investments are low compared with earnings, and over the last 18 months private consumption has increased far less than


117

disposable incomes. This means that consumption as a ratio of dispos-able incomes is low by historical standards. Real disposable incomes are likely to grow at a much slower pace in the coming years, but neverthe-less we expect private consumption to increase somewhat, so that the consumption ratio will approach its normal level. We also expect a cer-tain increase in private investment as firms benefit from rising demand, both at home and abroad.

Based on the above, Danmarks Nationalbank expects growth in Den-mark to be just under 2 per cent p.a. this year and the next few years. This is slightly higher than the expected growth rate in the euro area, and also higher than the underlying growth in Denmark's output poten-tial. As a result, net unemployment is set to decline slowly towards its structural level of around 100,000. Structural unemployment is the level of unemployment that is sustainable in the long term and that is com-patible with low and stable Danish inflation in line with that of the euro area.

Although the loss of output was unusually large during the crisis, un-employment was so low at the outset that net unemployment has not risen much above its structural level after the crisis. Furthermore, as I have already mentioned, the economy is set to grow at a solid pace by Danish standards in the coming years.

We can also see that the European sovereign debt crisis has made in-ternational investors far more aware of whether individual countries are pursuing responsible fiscal policies.

That is why Danmarks Nationalbank repeatedly urges the Danish gov-ernment to maintain the tight fiscal policy planned for the coming years. We do not need any new stimulus packages at the moment. If, contrary to expectations, the international economy goes into reverse again, it would be sad if Denmark uses up all its fiscal policy room of manoeuvre right now – at a time when the economy is actually moving forward.

If our expectations are exceeded, it would not be good to have ex-ploited the scope for growth beforehand. In that case the risk of re-newed overheating would be imminent.

Denmark experienced strong cyclical fluctuations in the last decade. They were not only attributable to the international financial crisis, but were to some extent self-inflicted. Partly because fiscal policy had been eased during the boom, and partly because we have introduced a num-ber of housing market structures that amplify rather than dampen cycli-cal fluctuations. These include the freeze on property value tax in kroner and the development of new loan types, notably loans with deferred amortisation. They are also known as loans with payment holidays. Since


118

more than half of all mortgage loans are now with deferred amortisa-tion, the holiday has almost become permanent.

The freeze means that the effective property value tax declines in a boom when house prices go up. On the other hand, it cannot decline when house prices go down. Analyses in Danmarks Nationalbank's most recent Monetary Review (English version to be issued) show that price fluctuations can be dampened if the property value tax is, once again, allowed to move in parallel with house prices.

Our analyses also indicate that home buyers to some extent see amor-tisation of mortgage loans as an expense in line with, say, interest and housing taxes. So the use of deferred-amortisation loans amplifies fluc-tuations in house prices. If prices go up, loans with amortisation entail a larger increase in overall payments to service the loan compared with deferred-amortisation loans. The higher costs dampen the demand for housing and curb the price rise. Conversely, if house prices fall, loans with amortisation entail a larger decline in the payments compared with deferred-amortisation loans.

This stimulates the demand for housing and helps to buoy up the mar-ket. In other words, loans with amortisation help to stabilise house prices. This favourable effect is lost as deferred-amortisation loans gain ground. Our analyses show that deferred-amortisation loans have con-tributed more to the fluctuations in house prices than the freeze on property value tax.

To dampen the strong fluctuations in the housing market, Danmarks Nationalbank has suggested that the link between property value tax and property value should be re-established and that access to new de-ferred-amortisation loans should gradually be phased out.

There have been widespread concerns that our proposals could be det-rimental to the housing market. On the contrary; the aim is to increase stability and provide a bulwark against excessive fluctuations in both directions. As for the potential problems in connection with the transi-tion to a more stable system, I would like to emphasise two factors.

Firstly, our proposals do not affect existing deferred-amortisation loans. We simply suggest a gradual and gentle lowering of the threshold for new mortgage loans with deferred amortisation.

Secondly, we do not propose restoring the property value tax to the somewhat higher level applying before the tax freeze was introduced in 2002. That is another issue – which I will not discuss here.

We are merely suggesting that further erosion of the property value tax should be prevented by letting taxes match developments in prop-erty value in future. This could act as an automatic stabiliser. If interest rates suddenly begin to rise unexpectedly, pressing house prices down,


119

our proposal means that the property value tax automatically decreases, and this will dampen the price fall.

The stabilising effects of these proposals would provide considerable gains for the economy. That would also be in the interests of homeown-ers. If our proposals are rejected, we would like to hear other sugges-tions for preventing large future fluctuations in house prices that could jeopardise economic and financial stability.

Both internationally and in Denmark economists are discussing the les-sons to be learned from the financial crisis, and the future regulation of the financial system in the light of this experience. As I see it, an artificial distinction is being made in Denmark. In simplified terms you could say that there is broad understanding that the requirements for banks must be tightened. In contrast, there seems to be little understanding that the same could apply to the activities of mortgage banks. In my opinion, we also need to focus on mortgage credit.

Danmarks Nationalbank's proposal to phase out deferred-amortisation loans and realign property value tax is one response to the lessons learned from the financial crisis. It can also provide part of the answer to another important question: how do we ensure the underlying collateral of covered bonds if house prices fall? I have previously pointed out that the need to provide additional collateral in that situation could have a destabilising effect, and I have encouraged the Ministry of Economic and Business Affairs to look into the issue. The problem is that mortgage loans granted on the basis of covered bonds cannot exceed 80 per cent of the value of the home. If the price falls so that the total mortgage exceeds 80 per cent of the value, the mortgage bank must raise addi-tional collateral to bridge the gap. A permanently lower loan-to-value ratio for mortgages would directly address this issue, but as you know, it was not possible to muster support for this solution when covered bonds were introduced.

Slow and gentle phasing-out of deferred-amortisation loans would help to solve the problem, as falls in house prices would be cushioned and the mortgages would gradually be repaid, thereby reducing the risk of conflicting with this rule. We need mechanisms that will automati-cally support compliance so that it will not be necessary to issue new debt instruments at a time when house prices are falling. But I am open to other suggestions. You just have to remember that money is most difficult to come by when you need it the most.

Let me now turn to the popular adjustable-rate mortgage loans. Vari-able-rate loans can actually help to stabilise the economy, provided that the Danish economy is moving in synch with that of the euro area. In that situation we will "import" euro area interest rates, which will fit in


120

well with economic developments in Denmark. But if we are at another cyclical stage, it is, of course, important for fiscal policy to compensate for this.

For a number of years, variable-rate loans have meant lower expenses for homeowners. The more widespread use of these loans make house-holds more vulnerable to rising interest rates. If the yield on the bonds used to finance adjustable-rate loans rises, homeowners must foot the bill – even if the increase is extraordinarily high, perhaps in connection with a currency crisis. It is very important that homeowners are aware of this risk and have taken it into account in their budgets. I have the im-pression that most households will be resilient to the rise in interest rates resulting from ordinary cyclical developments.

What concerns me most about adjustable-rate loans is their inherent refinancing risk. Mortgage banks offer 30-year loans financed via short-term bonds – often with annual refinancing. Another lesson learned from the financial crisis is that there is a real risk that these markets will stop functioning at times, or that interest rates soar to extraordinary levels.

I have already said on several occasions that it is a good idea to spread the auctions, and I would like to acknowledge – once again – the initia-tives taken in this respect. I strongly encourage all mortgage banks to follow suit.

Refinancing risk is part of the product design. This is the risk that the forthcoming regulation on stable financing is addressing – and should address. The details are not in place yet, but it is planned to take effect in 2018. This will require major structural adaptations that cannot be achieved overnight. The mortgage-credit market is like a super tanker. It takes time to change the course and gradually adapt, so preparations must start well in advance. Mortgage banks should already begin to develop products that will adequately address the issue of refinancing risk.

I have also made it clear to the financial institutions that use of Dan-marks Nationalbank's lending facilities is not an acceptable solution for managing refinancing risk. I take this opportunity to repeat that mes-sage. Securities should only be pledged as collateral to Danmarks Na-tionalbank in connection with ordinary monetary-policy operations. If we find that the system is being misused to support the housing market, we will take action and perhaps have a friendly talk with the institution in question. We have done that before. Eligibility as collateral must not be a precondition for a given mortgage-credit product.

Today I have presented a number of proposals for regulating various issues in relation to mortgage credit in order to make the system more


121

resilient to future developments. The financial crisis has demonstrated that rare misfortunes do actually strike from time to time. This should be taken into account in financial regulation. This applies not only to banks – but also to mortgage banks.

Finally, I would like to thank the Federation for our good cooperation during the past year and for inviting me to speak at today's meeting.

Thank you for your attention.


123

Speech by Nils Bernstein at the Annual Meeting of the Association of Danish Mortgage Banks on 27 April 2011

Growth in the global economy remains robust and is increasingly selfsus-tained. As regards 2011, the International Monetary Fund has lowered its growth expectations for the USA, Japan and the UK a little, while expectations for Germany have been adjusted upwards. Factors such as the high energy and commodity prices are expected to curb growth.

The rising energy and commodity prices have contributed to higher in-flation worldwide, not least in many developing countries. In the euro area, inflation stood at 2.7 per cent in March, which is considerably above the medium-term target of just below 2 per cent.

In the assessment of the European Central Bank, inflationary risks in the euro area are on the upside. Against this background, the ECB raised its lending rate by 0.25 percentage point at the beginning of this month, after having kept it constant at a very low level for almost two years. Danmarks Nationalbank followed suit.

The debt crisis in the EU is still evolving. Portugal has now – some peo-ple might say finally – applied to the EU and the IMF for financial assis-tance. Matters are further complicated by the uncertain political situa-tion in Portugal, where a caretaker government is in charge until the election in June. It has been indicated that the assistance package will impose more stringent conditions than the reform package which brought down the Portuguese government – and that broad political agreement must be reached before the election. Viewed on the basis of developments in yield spreads, there seems to be a decoupling of mar-ket assessments of the situation in the three troubled member states – Portugal, Ireland and Greece – on the one hand, and the rest of the euro area – including Spain and Italy – on the other hand. This is positive and gives us reason to hope that the debt crisis in the EU can be contained.

Turning to the Danish economy, the upswing is also becoming more evident here. The negative growth in the 4th quarter of 2010 seems to have been a one-off. Danmarks Nationalbank expects growth in 2011 to be just below 2 per cent, which is actually above the EU average. House-hold disposable income is set to develop at a substantially weaker pace than last year, but on account of the currently very low consumption and investment ratios – combined with strong growth in some of Den-


124

mark's largest export markets – we still expect some growth in private consumption and business investment. Momentum in the Danish econ-omy is presumably so strong that a gradual increase in short-term inter-est rates to a more normal level is unlikely to trigger an economic rever-sal, although it will, viewed in isolation, have a dampening effect.

The positive outlook is supported by developments in the labour mar-ket. Gross unemployment had been flat for a while, but fell by 3,000 in February. It is probably too optimistic to expect similar declines in the coming months, but the figures do indicate that unemployment has peaked at a considerably lower level than previously expected. Right now it is only slightly above its structural level.

So there is no need to ease fiscal policy relative to the plans laid down for the next couple of years. In the current situation, expansionary fiscal policy could easily strengthen cyclical trends rather than smoothing them, as it did in the boom years before the financial crisis. That would not be expedient.

A few weeks ago, the Danish government presented its 2020 plan. The plan quantifies the challenges that we must meet if we are to ensure balanced public finances in 2020. It also includes proposals for tackling these challenges. I welcome that.

Some of the assumptions behind the 2020 plan are highly ambitious, not least the target of very low growth in public spending in the next decade.

However, it is essential to keep growth in public spending under con-trol if we are to achieve balanced public finances. Otherwise we will be heading for unsustainable debt developments that will amplify the problems. Unlike many other countries, Denmark has little room for manoeuvre on the revenue side as taxes are already high. Consequently, balance must be achieved by reining in expenditure.

If we look at the development in public consumption as a ratio of GDP over the last 50 years – from the introduction of the welfare state until today – two facts stand out. Firstly, public consumption has increased relative to total output throughout the period – except in the first 4 years of the Schlüter government in the 1980s. Secondly, it is worth not-ing that the rising trend has continued, irrespective of the colour of the government.

It is not surprising that growth in public consumption was strongest in the first 25 years of the welfare state, when the educational level and participation rate of women increased rapidly. That has not been the case in the last 25 years. Yet public consumption as a ratio of total out-put has still risen, albeit at a slower rate. My conclusion is that in Den-mark there is an ingrained pressure to solve problems by increasing pub-


125

lic spending, both among politicians and in the population in general. Altering that will require a radical change of attitude; statutory control mechanisms to cap public spending as a ratio of GDP could be the first step. It will be difficult – extremely difficult! But it is unavoidable.

Even if all the proposals in the 2020 plan were to be adopted, we will be facing a lengthy period of sustained government deficits after 2020. So although the deficit remains well below the 3-per-cent limit in the baseline scenario presented by the government, we still risk being hit by large government deficits in connection with the cyclical downturns that tend to occur from time to time. For this reason it is important to have automatic stabilisers in place that can curb cyclical fluctuations.

This is the main background to Danmarks Nationalbank's proposal to phase out deferred-amortisation loans and to let property value tax develop in step with house prices. Both proposals would contribute to dampening fluctuations in the housing market and hence in the econ-omy overall.

In addition to strengthening public finances, we need to boost growth in the Danish economy. I am chiefly thinking of measures to increase potential output. This is not achieved through expansionary fiscal policy, but through structural reforms to improve the economic framework conditions and increase the supply of labour.

Phasing out the early retirement scheme is an example of such a re-form. Discussions tend to centre on how much this step might improve public finances. That is indeed an important aspect, but we often forget that phasing out the scheme is also likely to contribute to increasing potential growth in the economy in the phasing-out period by prevent-ing a decline in the labour force. In other words, phasing out the early retirement scheme can contribute both to improving public finances and to strengthening the growth potential of the economy, thereby provid-ing a permanent wealth gain. Few alternative measures can match that.

Potential growth is the determining factor for how difficult it will be to achieve the 2020 plan's target of reducing public consumption as a ratio of cyclically adjusted GDP from 29 to 27 per cent. The lower the potential growth, the more painful the process will be. In the coming decades demographics are against us. Productivity developments will be of paramount importance to growth in the Danish economy.

The extraordinary measures introduced by the European Central Bank to supply liquidity to the market during the crisis led to a period of very low market interest rates in the euro area. Spreads to the corresponding Danish interest rates widened, leading to capital inflows and a tendency for the krone to strengthen. To keep the krone stable against the euro, Danmarks Nationalbank purchased foreign exchange in the market in


126

the 1st half of 2010 and on several occasions lowered its interest rates unilaterally. From the spring of 2010, only the rate of interest on certifi-cates of deposit and the current-account rate were lowered, while the lending rate was kept unchanged, so that the spread to the ECB's benchmark interest rate remained 0.05 percentage point.

Liquidity conditions in the euro area are now normalising, and euro area money market interest rates are, once again, approaching the ECB's benchmark interest rate. To the extent that higher market interest rates in the euro area lead to pressure on the krone, Danmarks Nationalbank will follow its usual practice, including raising interest rates if necessary. This will apply to both lending and deposit rates. We have no plans to deviate from the principle of operating with a margin between the rate of interest on certificates of deposit and the lending rate.

Public debate sometimes focuses on the high gross debt of Danish households relative to GDP or to household disposable income. But the households' pension and housing wealth is also high. The fact that the assets are less liquid than the liabilities entails a certain degree of vul-nerability.

The high gross debt is primarily reflected in household mortgages. This, in turn, should be viewed against the background of the efficient Danish mortgage credit system, which differs materially from those seen in most other countries.

Despite their high gross debt, Danish households have weathered the financial crisis. Losses in the banking sector have been limited seen in relation to the crisis in the early 1990s, and have only to a small extent been attributable to the household sector. Mortgage arrears ratios are also low and declining.

All the same, I believe that the resilience of the households should be strengthened on account of their high debt ratios. After all, tax cuts, special pension savings disbursements and very low interest rates might not be on the agenda the next time a crisis comes knocking on our door. High debt goes hand in hand with a risk of technical insolvency and lack of mobility.

Since it became possible to issue covered bonds – in Denmark known as SDOs – instead of traditional mortgage bonds in 2007, these bonds have accounted for an increasing share of the outstanding volume of mortgage bonds – currently 60 per cent. As you know, SDOs are subject to the condition that the value of the individual loan must never exceed 80 per cent of the underlying collateral. If house prices go down, the mortgage banks must pledge top-up collateral. One way of financing this is by issuing less collateralised junior covered bonds. The proceeds are used to buy e.g. government securities that are pledged as top-up


127

collateral. In our estimate, a 10-per-cent fall in house prices entailed a need for top-up collateral amounting to around kr. 25 billion in 2008. By 2010, this figure had risen to an estimated kr. 100 billion plus, mainly due to the more widespread use of SDOs. Consequently, Danmarks Na-tionalbank is pleased to note that the minister for economic and busi-ness affairs has met the wish to look into this issue. The risk is increasing and should be addressed in time. Danmarks Nationalbank has on previ-ous occasions pointed to the option of reducing the borrowing limit in connection with mortgage credit.

Another familiar issue is refinancing risk in connection with adjust-able-rate loans – in both kroner and euro. Spreading the refinancing auctions over the year reduces the volume of adjustable-rate loans af-fected if an auction date coincides with a complete or partial market crash. Danmarks Nationalbank welcomes the invitation from the Asso-ciation of Danish Mortgage Banks and the Danish Mortgage Banks' Fed-eration to work with them to identify the possibilities of reducing the refinancing risk on adjustable-rate loans.

With these words I would like to thank the Association of Danish Mortgage Banks and its members for our successful cooperation during the past year.

Thank you for your attention.


129

Press Releases

17 MARCH 2011: NEW SHIP COIN WITH EMMA MAERSK AS ITS MOTIF

Tomorrow Danmarks Nationalbank issues a new 20-krone coin with the container vessel Emma Maersk as its motif. This is the ninth coin in a series with ships as their common motif.

When she was launched in 2006, Emma Maersk was the largest and longest container vessel ever built. Emma Maersk maintains a regular service between the Far East and Europe through the Suez Canal.

The artist behind the coin is the sculptor Torben Ebbesen. He was also the artist behind the ship coin with M/S Selandia and the H.C. Andersen Nightingale fairy tale coin.

The Emma Maersk coin is issued in an edition of 0.8 million. It is of the same size and alloy as the ordinary 20-krone coin in circulation. The ob-verse of the coin shows a profile of the Danish Queen.

The new thematic coin will be in circulation from tomorrow. It can be purchased from certain banks, Danmarks Nationalbank ( Banking Ser-vices) and via the website of The Royal Danish Mint, www.royalmint.dk

7 APRIL 2011: INTEREST RATE INCREASE

Effective from 8 April 2011, Danmarks Nationalbank's lending rate is raised by 0.25 per cent to 1.30 per cent, the rate of interest on certifi-cates of deposit is raised by 0.25 per cent to 0.95 per cent, the current account rate is raised by 0.25 per cent to 0.85 per cent and the dis-count rate is raised by 0.25 per cent to 1.00 per cent.

The interest rate increase is a consequence of the increase by the Euro-pean Central Bank of its rate on the main refinancing operations by 0.25 per cent to 1.25 per cent.

Effective from the above date, Danmarks Nationalbank's interest rates are:

Lending rate: 1.30 per cent. Certificates of deposit: 0.95 per cent. Current account: 0.85 per cent. Discount rate: 1.0 per cent.


130

17 MAY 2011: THE NEW BANKNOTE SERIES WILL NOW BE COMPLETE

On 24 May Danmarks Nationalbank will issue the new 1000-krone bank-note in the banknote series which has Danish bridges and prehistoric finds as their motifs. The new 1000-banknote depicts The Great Belt Bridge and the Sun Chariot.

Governor Nils Bernstein: "The 1000-krone banknote is the last and the largest in the banknote series. It is therefore only appropriate that the motifs on this banknote are The Great Belt Bridge and the Sun Chariot, two Danish jewels in terms of bridge constructions and prehistoric finds".

The series has been designed by the artist Karin Birgitte Lund in col-laboration with Danmarks Nationalbank’s Banknote Printing Works. Karin Birgitte Lund has chosen to interpret bridges as links between various parts of Denmark and the banknotes as links between the past and the present. The present is represented by the bridges, and the past by five distinctive prehistoric objects found near the bridges.

"At Danmarks Nationalbank we are very pleased with the new bank-note series which has a high degree of security and is beautifully de-signed by the artist Karin Birgitte Lund", says Nils Bernstein.

In addition to the 1000-krone banknote, the banknote series comprises four banknotes:

The 50-krone banknote, the Sallingsund Bridge and the Skarpsalling Vessel, the 100-krone banknote, the Old Little Belt Bridge and the Hindsgavl Dagger, the 200-krone banknote, Knippels Bridge and the Langstrup Belt Plate and the 500-krone banknote, Dronning Alexan-drines Bro and the bronze pail from Keldby.

To remain one step ahead of potential counterfeiters, Danmarks Na-tionalbank is incorporating new security features in the new bank-notes.

These new features include a window thread with a moving wave pat-tern and a new, sophisticated hologram that reflects light in different colours. The new banknotes will also have the traditional security fea-tures such as the watermark and the hidden security thread. All new banknotes have the same security features.

All Danish banknotes issued since 1945 are still legal tender and can be exchanged at face value at Danmarks Nationalbank.

7 JUNE 2011: NEW SHIP COIN FEATURING PADDLE STEAMER HJEJLEN

Danmarks Nationalbank tomorrow issues a new 20-krone coin featuring paddle steamer Hjejlen. This is the 10th coin in the ship coin series.


131

Hjejlen is the world's oldest paddle steamer still operating. It was built in Copenhagen in 1861 and thus this year marks its 150 years anniversary. The original idea was that the paddle steamer would stimulate the tour-ism to Himmelbjerget.

The coin has been designed by medallist at the Royal Danish Mint, Henrik Wiberg who also designed the ship coin depicting the royal yacht Dannebrog.

The coin showing Hjejlen is minted in 0.7 million copies. It is of the same size and alloy as the ordinary circulating 20-krone coin. The ob-verse side of the coin carries the portrait of Danish Queen Margrethe II.

The new ship coin is put in circulation tomorrow. It can be purchased in most banks, at Danmarks Nationalbank and via the website of the Royal Danish Mint, www.royalmint.dk.


26-07-2011 13:35:00 Antal sider: 28 Rev. nr. 16 H:\kvo\ENG\2011\2 qt, Part

1\faerdige\tabtill_2mon_11.doc Oprettet af Palle Lorentzen

Tables

Interest rates and share-price index ........................................................ 1 Selected items from Danmarks Nationalbank's balance sheet .............. 2 Factors affecting the banks' and the mortgage-credit institutes' net position with Danmarks Nationalbank ........................... 3 Selected items from the consolidated balance sheet of the MFI sector 4 Money stock .............................................................................................. 5 Selected items from the balance sheet of the banks ............................. 6 Selected items from the balance sheet of the mortgage-credit institutes ................................................................. 7 Lending to residents by the banks and the mortgage-credit institutes 8 The mortgage-credit institutes' lending broken down by type ............ 9 The banks' effective interest rates ........................................................... 10 Danmarks Nationalbank's lending survey ............................................... 11 Selected items from the balance sheet of investment funds ................. 12 Securities issued by residents by owner's home country ........................ 13 Households' financial assets and liabilities ............................................. 14 Companies' financial assets and liabilities .............................................. 15 Current account of the balance of payments ......................................... 16 Financial account of the balance of payments ....................................... 17 Portfolio investments of the balance of payments ................................ 18 Denmark's external assets and liabilities ................................................. 19 GDP by type of expenditure ..................................................................... 20 EU-harmonized index of consumer prices (HICP) and underlying inflation (IMI) ......................................................................... 21 Selected monthly economic indicators .................................................... 22 Selected quarterly economic indicators ................................................... 23 Exchange rates .......................................................................................... 24 Effective krone rate .................................................................................. 25 Danmarks Nationalbank's Statistical Publications




Symbols and Sources 0 Magnitude nil or less than one half of unit employed. … Data not available or of negligible interest. Some of the most recent statistics may be provisional. Due to rounding-off there may be small differences between the sum of the individual figures and the totals stated. The Tables section of this publication is closed on 9 June 2011. Danmarks Nationalbank is the source for Tables 1-15, 17-19 and 24-25, while the Nasdaq OMX Copenhagen is the source for series of bond yields and the share-price index in Table 1. Statistics Denmark is the source for Tables 16 and 20-23. The calculations in Tables 21 and 25 have been made by Danmarks Nationalbank on the basis of data from Statis-tics Denmark and OECD.




INTEREST RATES AND SHARE-PRICE INDEX Table 1

Danmarks Nationalbank's interest rates

The ECB's

interest rate Bond yields

Discount rate Lending

Certifi-cates of deposit

Main refinanc-

ing opera-tions, fixedrate1

Inter-bank

interest rate,

3-months uncol-lateral-

ized

10-year central- govern-

ment bond

30-year mort-gage-credit bond

Share-price index

OMXC20 (prev.KFX)

Effective end-of-year/ from Per cent per annum

End of period Per cent per annum

3.7.89 =100

2006 ........ 3.81 3.95 5.24 441.48 2007 ........ 4.65 4.48 5.61 464.14 2008 ........ 4.20 3.31 6.21 247.72 2009 ........ 0.85 3.62 5.19 336.69 2010 ........ 0.87 2.98 4.53 457.58 May 10 .. 0.50 2.69 4.81 388.69 Jun 10 .. 0.50 2.68 4.80 393.02 Jul 10 .. 0.55 2.76 4.79 410.83 Aug 10 .. 0.62 2.16 4.09 396.38 Sep 10 .. 0.55 2.35 4.15 416.96 Oct 10 .. 0.90 2.61 4.31 424.20 Nov 10 .. 0.80 2.82 4.47 424.77 Dec 10 .. 0.87 2.98 4.53 457.58 Jan 11 .. 0.84 3.15 4.65 462.11 Feb 11 .. 0.82 3.17 4.71 473.64 Mar 11 .. 0.92 3.39 5.23 467.15 Apr 11 .. 1.02 3.27 5.19 462.81 May 11 .. 1.04 3.03 5.11 456.25

1 Until 7 October 2008 minimum bid rate.

2006 ............... 3.50 3.75 3.75 3.50 2007 ............... 4.00 4.25 4.25 4.00 2008 ............... 3.50 3.75 3.75 2.50 2009 ............... 1.00 1.20 0.95 1.00 2010 0.75 1.05 0.70 1.00

2009 29 Sep .. 1.00 1.25 1.00 1.00 11 Dec . 1.00 1.20 0.95 1.00

2010 8 Jan .. 1.00 1.15 0.90 1.00 15 Jan .. 0.75 1.05 0.80 1.00 26 Mar.. 0.75 1.05 0.70 1.00 20 May . 0.75 1.05 0.60 1.00 27 May . 0.75 1.05 0.50 1.00 15 Oct .. 0.75 1.05 0.60 1.00 29 Oct .. 0.75 1.05 0.70 1.00

2011 8 Apr . 1.00 1.30 0.95 1.25

9 Jun ... 1.00 1.30 0.95 1.25

...............

.

.

.

.




SELECTED ITEMS FROM DANMARKS NATIONALBANK'S BALANCE SHEET Table 2

The banks' and the mortgage-credit institutes' net position with


The foreign-

exchange reserve

(net)

Notes and coin in circula-

tion

The central govern-ment's account

with Danmarks National-

bank

Certifi-cates of deposit

Deposits (current account) Loans

Total net position

End of period Kr. billion 2006 ................................... 171.7 59.8 73.8 163.2 8.8 153.7 18.2 2007 ................................... 168.8 61.6 89.9 200.5 9.4 216.8 -6.9 2008 ................................... 211.7 61.3 262.8 118.5 9.7 240.9 -112.7 2009 ................................... 394.5 60.8 212.4 166.2 22.1 104.2 84.1 2010 ................................... 428.7 62.5 179.4 132.5 14.5 9.3 137.8 May 10 ............................ 440.5 61.3 199.8 120.3 16.8 0.5 136.6 Jun 10 ............................ 438.4 61.4 220.7 142.1 23.5 47.2 118.4 Jul 10 ............................ 428.7 61.2 191.5 121.0 16.0 0.1 136.9 Aug 10 ............................ 429.2 60.9 216.8 95.3 16.0 0.1 111.3 Sep 10 ............................ 431.3 60.7 218.5 108.2 12.6 9.9 110.9 Oct 10 ............................ 421.7 61.1 206.3 99.9 16.1 0.1 115.9 Nov 10 ............................ 419.2 61.1 192.2 111.3 15.3 1.2 125.4 Dec 10 ............................ 418.6 62.5 177.3 132.5 14.5 9.3 137.8 Jan 11 ............................ 430.1 60.3 184.0 120.5 14.8 2.4 133.0 Feb 11 ............................ 446.4 60.7 235.2 66.8 23.9 0.4 90.4 Mar 11 ............................ 453.9 59.9 242.2 95.0 12.2 7.9 99.4 Apr 11 ............................ 454.1 61.9 244.9 85.5 12.0 0.9 96.6 May 11 ............................ 453.4 62.0 245.4 79.4 17.2 0.3 96.4




FACTORS AFFECTING THE BANKS' AND THE MORTGAGE-CREDIT INSTITUTES' NET POSITION WITH DANMARKS NATIONALBANK Table 3

Central-government finance

Net purchase of foreign exchange by


The banks' and the mortgage-

credit institutes' net position

with Danmarks

Nationalbank

Do-mestic gross

financ-ing

require-ment

Sales of do-

mestic central-govern-

ment securi-

ties, etc.

Liquid-ity

effect

Interven-tions to

purchase foreign

exchange, net Other Total

Net pur-

chase of

bonds by

Dan-marks

Nation-albank

Other factors

Change in net

position End of period

Kr. billion

2006 ................ -14.5 16.2 -30.6 -34.3 4.3 -30.0 -4.9 -1.2 -66.7 18.2 2007 ................ -26.1 2.9 -29.1 -1.7 7.2 5.5 -0.4 -1.4 -25.3 -6.9 2008 ................ -11.9 99.6 -111.5 -19.9 0.1 -19.8 0.6 24.9 -105.8 -112.7 2009 ................ 178.6 123.8 54.8 153.6 17.1 170.7 6.5 -35.3 196.8 84.1 2010 ................ 169.6 160.7 8.8 45.7 4.3 50.0 -0.4 -4.7 53.7 137.8 May 10 .......... 4.4 15.1 -10.7 38.5 -0.7 37.8 1.0 -1.6 26.5 136.6 Jun 10 .......... 4.2 26.2 -22.0 0.0 -1.0 -1.0 0.2 4.6 -18.1 118.4 Jul 10 .......... 36.5 8.5 28.0 -8.7 0.3 -8.4 0.0 -1.2 18.5 136.9 Aug 10 .......... -15.6 10.1 -25.7 0.0 0.9 0.9 -0.2 -0.7 -25.6 111.3 Sep 10 .......... 7.8 10.7 -2.9 3.4 0.1 3.5 -0.5 -0.6 -0.4 110.9 Oct 10 .......... 14.2 4.3 9.9 -7.3 0.1 -7.2 -0.2 2.6 5.0 115.9 Nov 10 .......... 24.2 10.3 13.9 -2.2 0.0 -2.2 0.0 -2.2 9.5 125.4 Dec 10 .......... 20.9 6.3 14.6 0.2 -0.4 -0.2 -0.5 -1.5 12.4 137.8 Jan 11 .......... 8.5 14.9 -6.4 0.0 1.2 1.2 -1.4 1.8 -4.8 133.0 Feb 11 .......... -27.5 9.5 -37.0 0.0 2.2 2.2 0.6 -8.5 -42.6 90.4 Mar 11 .......... 1.5 -0.2 1.7 -0.4 -0.7 -1.1 1.0 7.4 9.0 99.4 Apr 11 .......... 12.0 15.1 -3.1 0.0 0.7 0.7 0.2 -0.5 -2.7 96.6 May 11 .......... 9.1 9.5 -0.3 0.0 -0.7 -0.7 0.5 0.3 -0.3 96.4




SELECTED ITEMS FROM THE CONSOLIDATED BALANCE SHEET OF THE MFI SECTOR Table 4

Assets Liabilities

Domestic lending Domestic securities

Total balance

Public sector

Private sector

Bonds, etc.

Shares, etc.

Domestic deposits

Bonds, etc.

issued

Foreign assets, net 1

End of period Kr. billion

2006 ................... 4,656.2 116.8 2,956.0 51.8 60.3 1,077.0 1,433.4 -223.0 2007 ................... 5,446.3 117.5 3,356.1 43.3 63.5 1,219.7 1,505.2 -304.5 2008 ................... 6,286.4 129.1 3,724.3 40.6 56.7 1,487.5 1,508.4 -407.9 2009 ................... 5,970.1 135.9 3,647.9 78.2 65.5 1,427.9 1,650.9 -417.6 2010 ................... 6,151.8 146.6 3,700.7 41.9 79.5 1,410.1 1,711.8 -378.0 Apr 10 ............. 6,137.6 136.1 3,651.7 74.9 69.5 1,421.8 1,685.5 -396.3 May 10 ............. 6,435.3 136.8 3,679.3 66.3 70.3 1,428.2 1,718.9 -389.5 Jun 10 ............. 6,394.5 140.7 3,719.6 54.1 79.5 1,432.8 1,718.2 -396.4 Jul 10 ............. 6,398.7 143.7 3,694.1 46.5 80.9 1,443.1 1,721.4 -358.1 Aug 10 ............. 6,614.0 138.9 3,716.7 64.5 81.3 1,471.3 1,763.6 -332.5 Sep 10 ............. 6,511.8 143.1 3,713.9 66.2 74.3 1,430.8 1,792.8 -337.4 Oct 10 ............. 6,347.1 141.5 3,705.3 56.1 77.3 1,446.4 1,765.6 -309.4 Nov 10 ............. 6,325.0 142.4 3,702.8 29.9 77.8 1,415.4 1,700.4 -385.2 Dec 10 ............. 6,151.8 146.6 3,700.7 41.9 79.5 1,410.1 1,711.8 -378.0 Jan 11 ............. 6,091.9 144.2 3,668.2 42.9 81.5 1,400.0 1,702.5 -311.9 Feb 11 ............. 6,102.8 142.9 3,648.1 45.9 86.6 1,451.9 1,675.0 -274.0 Mar 11 ............. 6,077.6 146.0 3,672.3 46.3 85.1 1,448.4 1,678.0 -264.5 Apr 11 ............. 6,052.9 145.5 3,660.1 49.6 83.6 1,463.0 1,684.7 -256.3 Change compared with previous year, per cent

2006 ................... ... 8.3 14.4 -31.8 12.8 10.9 8.7 ... 2007 ................... ... 0.6 13.5 -16.4 5.2 13.3 5.0 ... 2008 ................... ... 9.8 11.0 -6.2 -10.7 22.0 0.2 ... 2009 ................... ... 5.3 -2.1 92.4 15.5 -4.0 9.4 ... 2010 ................... ... 7.9 1.4 -46.4 21.4 -1.2 3.7 ... Apr 10 ............. ... 5.2 -1.5 33.6 23.2 -1.2 7.4 ... May 10 ............. ... 6.5 0.2 11.1 21.6 -0.3 8.8 ... Jun 10 ............. ... 5.4 0.2 -10.4 34.0 1.9 6.0 ... Jul 10 ............. ... 5.9 0.5 -26.8 38.5 -0.1 6.0 ... Aug 10 ............. ... 6.5 1.7 -4.1 38.0 3.4 9.1 ... Sep 10 ............. ... 9.2 1.2 -8.5 20.6 1.6 7.5 ... Oct 10 ............. ... 7.5 1.7 -24.4 22.7 2.3 8.3 ... Nov 10 ............. ... 9.1 1.5 -60.0 22.9 1.7 3.4 ... Dec 10 ............. ... 7.9 1.4 -46.4 21.4 -1.2 3.7 ... Jan 11 ............. ... 7.8 0.2 -46.5 19.9 -2.1 1.1 ... Feb 11 ............. ... 8.2 -0.1 -36.4 26.2 2.1 -0.9 ... Mar 11 ............. ... 7.9 0.3 -40.0 23.1 2.0 -2.1 ... Apr 11 ............. ... 6.9 0.2 -33.8 20.4 2.9 -0.1 ... Note: The MFI sector includes Danish monetary financial institutions, i.e. banks and mortgage-credit institutes, other

credit institutions, money-market funds and Danmarks Nationalbank. 1 The net foreign assets of the MFI sector has been compiled as the difference between all assets and liabilities vis-a-vis

non-residents.




MONEY STOCK Table 5

Bank-notes and

coin in circula-

tion1

Deposits on

demand M1

Time deposits

with original maturity

=<2 years

Deposits at notice

with original maturity

=< 3 months M2

Repur-chase agree-ments

Bonds, etc.

issued with

original maturity

=< 2 years M3

End of period Kr. billion 2006 ............... 50.7 648.6 699.3 143.0 17.9 860.2 8.0 21.3 889.5 2007 ............... 51.9 703.2 755.1 199.7 18.0 972.8 6.2 61.5 1,040.6 2008 ............... 50.4 704.8 755.2 286.4 18.4 1,060.0 4.0 57.0 1,121.1 2009 ............... 48.5 746.6 795.1 188.0 19.6 1,002.7 10.9 143.0 1,156.7 2010 ............... 52.6 749.8 802.4 143.9 18.0 964.3 58.2 241.2 1,264.0 Apr 10 .......... 51.1 779.8 830.9 162.4 16.2 1,009.5 17.2 177.0 1,203.9 May 10 .......... 51.3 789.7 841.0 165.5 16.6 1,023.2 4.4 201.1 1,228.8 Jun 10 .......... 51.4 776.5 827.9 148.8 17.2 993.9 15.3 210.5 1,219.9 Jul 10 .......... 51.5 793.3 844.8 158.1 17.2 1,020.1 31.9 247.1 1,299.3 Aug 10 .......... 51.1 789.3 840.4 155.6 17.2 1,013.1 40.6 254.2 1,308.0 Sep 10 .......... 51.2 767.4 818.6 133.0 16.6 968.2 43.2 236.4 1,247.9 Oct 10 .......... 51.8 774.1 825.9 160.6 17.9 1,004.4 33.8 231.8 1,270.1 Nov 10 .......... 52.1 766.1 818.2 149.2 18.2 985.7 38.4 230.3 1,254.5 Dec 10 .......... 52.6 749.8 802.4 143.9 18.0 964.3 58.2 241.2 1,264.0 Jan 11 .......... 50.7 745.8 796.5 140.2 18.0 954.7 49.9 126.9 1,131.8 Feb 11 .......... 51.7 745.5 797.2 141.6 17.9 956.7 49.6 125.9 1,132.5 Mar 11 .......... 50.8 729.2 780.0 143.5 16.9 940.5 52.9 154.4 1,147.9 Apr 11 .......... 52.7 753.4 806.1 138.1 17.1 961.3 43.7 106.3 1,111.5

Change compared with previous year, per cent

2006 ............... ... ... 8.7 ... ... 10.8 ... ... 11.4 2007 ............... ... ... 8.0 ... ... 13.1 ... ... 17.0 2008 ............... ... ... 0.0 ... ... 9.0 ... ... 7.7 2009 ............... ... ... 5.3 ... ... -5.4 ... ... 3.2 2010 ............... ... ... 0.9 ... ... -3.8 ... ... 9.3 Apr 10 .......... ... ... 8.0 ... ... -3.2 ... ... 2.3 May 10 .......... ... ... 7.6 ... ... -3.1 ... ... 2.7 Jun 10 .......... ... ... 5.9 ... ... -3.5 ... ... 3.5 Jul 10 .......... ... ... 6.8 ... ... -2.8 ... ... 6.7 Aug 10 .......... ... ... 3.7 ... ... -3.7 ... ... 8.7 Sep 10 .......... ... ... 4.8 ... ... -4.4 ... ... 4.1 Oct 10 .......... ... ... 2.3 ... ... -2.6 ... ... 5.9 Nov 10 .......... ... ... 1.1 ... ... -3.3 ... ... 6.2 Dec 10 .......... ... ... 0.9 ... ... -3.8 ... ... 9.3 Jan 11 .......... ... ... -2.3 ... ... -6.6 ... ... -5.8 Feb 11 .......... ... ... -2.6 ... ... -5.6 ... ... -4.3 Mar 11 .......... ... ... -4.0 ... ... -5.2 ... ... -4.3 Apr 11 .......... ... ... -3.0 ... ... -4.8 ... ... -7.7

1 Notes and coin in circulation, excluding the banks' holdings.




SELECTED ITEMS FROM THE BALANCE SHEET OF THE BANKS Table 6

Assets Liabilities

Domestic lending

of which:

Total balance

Lending to MFIs Total

House-holds,

etc.

Non-financial compa-

nies

Holdings of

securities

Loans from MFIs Deposits


2006 ................... 3,216.1 715.0 1,124.3 475.0 458.0 889.6 1,133.4 1,148.3 2007 ................... 3,940.0 924.3 1,333.6 557.4 551.8 1,065.8 1,441.8 1,345.6 2008 ................... 4,568.5 974.6 1,546.3 586.8 603.3 1,092.1 1,444.2 1,424.2 2009 ................... 4,147.6 876.1 1,359.1 575.7 529.7 1,203.5 1,186.0 1,410.2 2010 ................... 4,196.6 902.7 1,334.6 570.2 494.7 1,156.3 1,118.3 1,489.7 Apr 10 ............. 4,226.3 916.4 1,333.6 560.0 528.0 1,189.8 1,149.0 1,440.4 May 10 ............. 4,485.0 958.3 1,352.7 558.9 527.0 1,216.5 1,180.2 1,456.0 Jun 10 ............. 4,485.9 917.9 1,388.3 569.5 531.6 1,275.3 1,204.8 1,421.3 Jul 10 ............. 4,437.4 935.8 1,361.4 563.1 510.8 1,243.5 1,152.5 1,490.6 Aug 10 ............. 4,611.5 965.2 1,370.5 563.3 518.5 1,221.8 1,165.3 1,540.0 Sep 10 ............. 4,537.0 910.0 1,362.2 570.9 504.6 1,223.7 1,297.3 1,463.6 Oct 10 ............. 4,347.9 921.8 1,349.0 563.9 496.3 1,154.1 1,174.2 1,513.3 Nov 10 ............. 4,398.6 977.7 1,338.9 560.7 498.6 1,179.5 1,235.7 1,509.7 Dec 10 ............. 4,196.6 902.7 1,334.6 570.2 494.7 1,156.3 1,118.3 1,489.7 Jan 11 ............. 4,079.1 833.4 1,300.3 560.8 488.8 1,159.7 1,050.1 1,476.3 Feb 11 ............. 4,024.0 832.0 1,280.1 558.7 485.2 1,134.6 999.6 1,465.0 Mar 11 ............. 3,977.1 796.4 1,300.6 565.0 483.1 1,133.3 993.5 1,442.9 Apr 11 ............. 3,930.7 727.7 1,286.8 559.8 478.6 1,127.4 898.4 1,443.6


2006 ................... ... 9.7 22.2 19.8 23.8 3.2 16.2 7.8 2007 ................... ... 29.3 18.6 17.4 20.5 19.8 27.2 17.2 2008 ................... ... 5.4 15.9 5.3 9.3 2.5 0.2 5.8 2009 ................... ... -10.1 -12.1 -1.9 -12.2 10.2 -17.9 -1.0 2010 ................... ... 3.0 -1.8 -1.0 -6.6 -3.9 -5.7 5.6 Apr 10 ............. ... -5.5 -9.5 -1.6 -7.0 -2.1 -20.9 1.7 May 10 ............. ... 9.2 -5.4 -0.8 -4.3 -8.6 -14.3 0.8 Jun 10 ............. ... 9.9 -5.0 -0.1 -4.4 -4.8 -12.9 1.2 Jul 10 ............. ... 12.9 -4.1 0.5 -4.7 -3.8 -6.8 3.8 Aug 10 ............. ... 20.3 -0.6 1.2 -2.3 -5.0 3.5 6.0 Sep 10 ............. ... 15.8 -2.1 0.4 -3.4 -1.3 13.4 5.0 Oct 10 ............. ... 17.5 -0.6 0.2 -4.1 -6.7 9.3 5.1 Nov 10 ............. ... 13.4 -1.2 0.0 -5.8 -2.1 7.0 5.7 Dec 10 ............. ... 3.0 -1.8 -1.0 -6.6 -3.9 -5.7 5.6 Jan 11 ............. ... -12.3 -4.5 -0.8 -6.6 -3.4 -16.5 3.4 Feb 11 ............. ... -14.2 -4.8 -0.4 -9.2 -3.9 -20.6 3.5 Mar 11 ............. ... -16.1 -3.5 -0.3 -9.3 -8.7 -21.4 1.8 Apr 11 ............. ... -20.6 -3.5 0.0 -9.4 -5.2 -21.8 0.2 Note: Excluding Danish banks' units abroad.




SELECTED ITEMS FROM THE BALANCE SHEET OF THE MORTGAGE-CREDIT INSTITUTES Table 7

Assets Liabilities

Domestic lending

of which:

Total balance

Lending to MFIs Total

House-holds,

etc.


nies

Holdings of

securities

Loans from MFIs

Bonds, etc.

issued


2006 ................... 2,699.9 245.1 1,834.8 1,420.2 358.2 574.1 226.5 2,297.9 2007 ................... 3,088.2 362.8 2,015.5 1,549.2 404.0 649.2 344.2 2,495.2 2008 ................... 3,322.7 428.5 2,164.6 1,629.6 466.7 633.5 474.4 2,582.3 2009 ................... 3,827.1 512.2 2,278.8 1,712.2 501.0 927.6 539.3 3,048.3 2010 ................... 3,960.3 572.7 2,351.3 1,753.3 532.0 926.1 576.9 3,139.8 Apr 10 ............. 3,122.4 424.8 2,298.2 1,718.0 512.8 286.9 477.7 2,453.6 May 10 ............. 3,171.6 460.2 2,305.5 1,723.4 517.3 289.5 496.8 2,491.3 Jun 10 ............. 3,263.7 523.3 2,315.2 1,730.0 518.3 315.6 529.3 2,538.8 Jul 10 ............. 3,229.2 477.8 2,320.4 1,734.5 519.5 315.9 515.7 2,516.5 Aug 10 ............. 3,288.0 502.8 2,328.9 1,742.0 519.8 332.4 534.2 2,561.6 Sep 10 ............. 3,398.8 583.7 2,336.6 1,743.5 524.8 361.9 530.4 2,648.3 Oct 10 ............. 3,277.5 498.8 2,340.0 1,747.4 525.6 337.2 520.3 2,564.0 Nov 10 ............. 3,384.5 524.7 2,347.7 1,752.5 528.8 401.5 541.4 2,634.0 Dec 10 ............. 3,960.3 572.7 2,351.3 1,753.3 532.0 926.1 576.9 3,139.8 Jan 11 ............. 3,206.3 454.4 2,350.5 1,751.4 533.2 302.4 515.7 2,481.6 Feb 11 ............. 3,226.3 455.3 2,349.7 1,749.0 534.8 312.5 525.5 2,487.0 Mar 11 ............. 3,432.6 509.9 2,354.7 1,748.4 539.1 465.1 562.9 2,635.3 Apr 11 ............. 3,202.2 451.5 2,356.3 1,751.7 539.0 297.5 506.8 2,482.4


2006 ................... ... 141.7 10.2 10.8 7.2 -11.0 49.3 2.7 2007 ................... ... 48.0 9.9 9.1 12.8 13.1 52.0 8.6 2008 ................... ... 18.1 7.4 5.2 15.5 -2.4 37.8 3.5 2009 ................... ... 19.5 5.3 5.1 7.4 46.4 13.7 18.0 2010 ................... ... 11.8 3.2 2.4 6.2 -0.2 7.0 3.0 Apr 10 ............. ... 12.5 3.7 3.4 5.7 19.7 12.3 6.9 May 10 ............. ... 18.0 3.6 3.2 6.2 21.7 17.8 7.3 Jun 10 ............. ... 16.5 3.5 3.2 5.8 20.1 20.0 6.8 Jul 10 ............. ... 22.3 3.2 3.0 5.2 18.9 20.7 6.2 Aug 10 ............. ... 25.0 3.1 3.0 4.2 10.7 19.3 6.1 Sep 10 ............. ... 31.2 3.1 2.9 4.6 9.6 20.9 6.8 Oct 10 ............. ... 21.4 3.0 2.9 4.4 -2.0 13.7 4.6 Nov 10 ............. ... 24.9 3.0 2.8 4.9 -5.9 18.7 3.0 Dec 10 ............. ... 11.8 3.2 2.4 6.2 -0.2 7.0 3.0 Jan 11 ............. ... 5.9 3.0 2.2 5.7 8.6 6.4 2.6 Feb 11 ............. ... 3.9 2.7 1.9 5.6 7.5 6.0 1.7 Mar 11 ............. ... 1.9 2.7 1.7 6.3 35.0 11.9 3.7 Apr 11 ............. ... 6.3 2.5 2.0 5.1 3.7 6.1 1.2




LENDING TO RESIDENTS BY THE BANKS AND THE MORTGAGE-CREDIT INSTITUTES Table 8

Total lending The banks' lending The mortgage-credit

institutes' lending

Total

House-holds,

etc. Business Total

House-holds,

etc. Business Total

House-holds,

etc. Business


2006 ............ 3,000.8 1,895.2 1,002.6 1,166.0 475.0 636.9 1,834.8 1,420.2 365.7 2007 ............ 3,387.8 2,106.7 1,173.0 1,372.3 557.4 760.5 2,015.5 1,549.2 412.4 2008 ............ 3,787.5 2,216.4 1,456.4 1,622.9 586.8 978.3 2,164.6 1,629.6 478.1 2009 ............ 3,682.4 2,287.9 1,283.8 1,403.6 575.7 770.0 2,278.8 1,712.2 513.8 2010 ............ 3,708.4 2,323.6 1,281.8 1,357.2 570.2 738.6 2,351.3 1,753.3 543.1 Apr 10 ....... 3,661.2 2,278.0 1,276.6 1,363.0 560.0 751.7 2,298.2 1,718.0 524.9 May 10 ....... 3,687.6 2,282.3 1,300.0 1,382.1 558.9 771.0 2,305.5 1,723.4 529.0 Jun 10 ....... 3,732.9 2,299.5 1,324.5 1,417.7 569.5 794.8 2,315.2 1,730.0 529.7 Jul 10 ....... 3,701.4 2,297.6 1,292.8 1,381.1 563.1 761.8 2,320.4 1,734.5 531.1

Aug 10 ....... 3,719.0 2,305.3 1,307.4 1,390.1 563.3 776.1 2,328.9 1,742.0 531.3 Sep 10 ....... 3,718.4 2,314.3 1,294.6 1,381.8 570.9 758.8 2,336.6 1,743.5 535.8

Oct 10 ....... 3,711.6 2,311.3 1,295.7 1,371.6 563.9 759.1 2,340.0 1,747.4 536.6 Nov 10 ....... 3,709.2 2,313.2 1,293.5 1,361.5 560.7 753.6 2,347.7 1,752.5 539.9

Dec 10 ....... 3,708.4 2,323.6 1,281.8 1,357.2 570.2 738.6 2,351.3 1,753.3 543.1 Jan 11 ....... 3,670.4 2,312.2 1,259.1 1,319.9 560.8 714.8 2,350.5 1,751.4 544.3

Feb 11 ....... 3,649.4 2,307.7 1,245.9 1,299.7 558.7 699.9 2,349.7 1,749.0 546.0 Mar 11 ....... 3,674.9 2,313.4 1,263.5 1,320.1 565.0 713.0 2,354.7 1,748.4 550.5

Apr 11 ....... 3,662.7 2,311.5 1,256.8 1,306.4 559.8 706.5 2,356.3 1,751.7 550.3


2006 ............ 14.8 12.9 17.7 22.7 19.8 24.8 10.2 10.8 7.0 2007 ............ 12.9 11.2 17.0 17.7 17.4 19.4 9.9 9.1 12.8 2008 ............ 11.8 5.2 24.2 18.3 5.3 28.6 7.4 5.2 15.9 2009 ............ -2.8 3.2 -11.9 -13.5 -1.9 -21.3 5.3 5.1 7.5 2010 ............ 0.7 1.6 -0.2 -3.3 -1.0 -4.1 3.2 2.4 5.7 Apr 10 ....... -2.3 2.1 -9.1 -10.9 -1.6 -17.0 3.7 3.4 5.1 May 10 ....... -0.7 2.2 -5.1 -7.0 -0.8 -11.2 3.6 3.2 5.6 Jun 10 ....... -0.6 2.4 -5.0 -6.6 -0.1 -10.7 3.5 3.2 5.0 Jul 10 ....... -0.3 2.4 -4.5 -5.7 0.5 -9.9 3.2 3.0 4.4 Aug 10 ....... 1.0 2.6 -1.6 -2.4 1.2 -4.7 3.1 3.0 3.5 Sep 10 ....... 0.4 2.3 -2.8 -3.8 0.4 -6.9 3.1 2.9 3.7 Oct 10 ....... 1.1 2.2 -0.6 -2.2 0.2 -3.3 3.0 2.9 3.5 Nov 10 ....... 0.8 2.1 -0.9 -2.8 0.0 -4.1 3.0 2.8 3.8 Dec 10 ....... 0.7 1.6 -0.2 -3.3 -1.0 -4.1 3.2 2.4 5.7 Jan 11 ....... -0.4 1.4 -2.9 -5.8 -0.8 -8.4 3.0 2.2 5.3 Feb 11 ....... -0.7 1.3 -3.6 -6.1 -0.4 -9.4 2.7 1.9 5.1 Mar 11 ....... -0.1 1.2 -2.0 -4.8 -0.3 -7.4 2.7 1.7 5.9 Apr 11 ....... 0.0 1.5 -1.5 -4.2 0.0 -6.0 2.5 2.0 4.9 Note: Including lending in Danish banks' units abroad.




THE MORTGAGE-CREDIT INSTITUTES' LENDING BROKEN DOWN BY TYPE Table 9

Adjustable-rate lending of which:

Index-linked

lending

Fixed-rate

lending Total of which =<1 year Total

Lending in foreign currency

Instal-ment-free lending 1

End of period Kr. billion 2006 ................................... 83.5 797.5 951.7 720.5 1,832.7 85.7 432.2 2007 ................................... 77.9 889.2 1,045.6 796.6 2,012.7 123.8 547.3 2008 ................................... 72.4 903.9 1,189.1 900.3 2,165.4 155.3 626.4 2009 ................................... 68.3 740.2 1,472.7 1,106.6 2,281.2 211.4 695.1 2010 ................................... 63.9 648.3 1,641.0 1,190.5 2,353.2 232.3 740.6 Apr 10 ............................ 69.0 684.4 1,548.1 1,147.9 2,301.5 221.8 706.2 May 10 ............................ 68.8 680.3 1,560.0 1,155.3 2,309.0 224.3 710.0 Jun 10 ............................ 66.7 666.2 1,585.6 1,170.7 2,318.4 228.1 716.4 Jul 10 ............................ 66.7 661.5 1,595.4 1,175.4 2,323.5 228.9 719.6 Aug 10 ............................ 66.6 664.5 1,600.5 1,176.7 2,331.6 229.5 722.9 Sep 10 ............................ 66.6 658.2 1,614.1 1,182.7 2,338.9 231.0 727.2 Oct 10 ............................ 66.5 655.6 1,619.8 1,177.3 2,341.8 231.3 731.8 Nov 10 ............................ 66.1 657.5 1,626.3 1,180.5 2,349.9 232.1 736.7 Dec 10 ............................ 63.9 648.3 1,641.0 1,190.5 2,353.2 232.3 740.6 Jan 11 ............................ 64.0 644.4 1,643.6 1,183.3 2,352.0 231.2 741.6 Feb 11 ............................ 64.1 643.9 1,647.8 1,184.8 2,355.8 231.5 744.8 Mar 11 ............................. 64.3 635.8 1,657.6 1,188.3 2,357.7 231.6 749.1 Apr 11 ............................ 64.4 633.4 1,660.4 1,197.0 2,358.1 230.8 751.2 Note: The Table includes the mortgage-credit lending to residents only, whereas Tables 7 and 8 include the institutes'

total lending to residents. 1 The mortgage-credit institutes' instalment-free lending to owner-occupied dwellings.




THE BANKS' EFFECTIVE INTEREST RATES Table 10

Lending Deposits

All sectors

House-holds,

etc.


nies

Financial compa-

nies All

sectors

House-holds,

etc.


nies

Financial compa-

nies

Per cent, per annum

Q1 06 ................ 4.8 6.2 4.5 2.8 1.9 1.5 2.0 2.4 Q2 06 ................ 5.0 6.4 4.7 3.1 2.1 1.8 2.3 2.6 Q3 06 ................ 5.2 6.6 5.0 3.3 2.4 2.1 2.5 2.8 Q4 06 ................ 5.4 6.8 5.2 3.5 2.7 2.4 2.9 3.2

Q1 07 ................ 5.7 7.1 5.5 3.6 3.1 2.8 3.2 3.4 Q2 07 ................ 5.9 7.2 5.7 4.0 3.4 3.1 3.4 3.8 Q3 07................. 6.1 7.4 6.0 4.1 3.6 3.3 3.6 4.0 Q4 07 ................ 6.2 7.4 6.1 4.3 3.7 3.4 3.7 4.1

Q1 08 ................ 6.2 7.5 6.1 4.5 3.7 3.5 3.8 4.2 Q2 08 ................ 6.5 7.7 6.3 4.6 3.8 3.6 3.9 4.2 Q3 08 ................ 6.6 7.8 6.5 4.9 4.0 3.6 4.1 4.5 Q4 08 ................ 7.0 8.4 7.1 5.2 4.4 3.9 4.5 5.0

Q1 09 ................ 6.0 7.4 6.3 4.0 3.3 2.8 3.2 4.1 Q2 09 ................ 5.1 6.4 5.4 2.7 2.2 2.0 2.0 2.6 Q3 09 ................ 4.5 6.0 5.0 2.1 1.7 1.7 1.5 1.9 Q4 09 ................ 4.1 5.6 4.6 1.7 1.4 1.5 1.1 1.5

Q1 10 ................ 3.9 5.5 4.4 1.5 1.2 1.4 0.9 1.3 Q2 10 ................ 3.6 5.3 4.2 1.3 1.0 1.2 0.7 1.0 Q3 10 ................ 3.5 5.1 4.1 1.2 0.9 1.1 0.6 0.8 Q4 10 ................ 3.6 5.1 4.2 1.2 0.9 1.1 0.6 0.9

Q1 11 ................ 3.8 5.2 4.2 1.3 1.0 1.1 0.7 0.9 Apr 10 ............. 3.7 5.4 4.3 1.3 1.1 1.3 0.8 1.1 May 10 ............. 3.7 5.4 4.3 1.3 1.0 1.2 0.8 0.9 Jun 10 ............. 3.5 5.1 4.1 1.2 0.9 1.1 0.6 0.9 Jul 10 ............. 3.5 5.2 4.1 1.1 0.9 1.1 0.6 0.8 Aug 10 ............. 3.5 5.1 4.1 1.2 0.9 1.1 0.6 0.8 Sep 10 ............. 3.5 5.1 4.1 1.2 0.9 1.1 0.6 0.8 Oct 10 ............. 3.5 5.2 4.2 1.1 0.9 1.1 0.6 0.8 Nov 10 ............. 3.7 5.2 4.3 1.2 0.9 1.1 0.6 0.9 Dec 10 ............. 3.5 5.1 4.1 1.1 0.9 1.0 0.7 0.9 Jan 11 ............. 3.8 5.2 4.2 1.3 0.9 1.1 0.6 0.9 Feb 11 ............. 3.8 5.2 4.3 1.4 1.0 1.1 0.7 1.0 Mar 11 ............. 3.9 5.1 4.2 1.4 1.0 1.1 0.7 0.9 Apr 11 ............. 4.0 5.3 4.4 1.5 1.0 1.1 0.8 1.1




DANMARKS NATIONALBANK'S LENDING SURVEY Table 11

Changes in banks and mortgage-credit institutes' credit policies

Corporate lending Lending to households

Development in current quarter

Expectations for the coming quarter

Development in current quarter

Expectations for the coming quarter

Net balance Q1 09 ................... -59.8 -27.6 -23.1 -5.2 Q2 09 ................... -10.4 -6.7 -1.0 -5.0 Q3 09 ................... -3.7 -0.9 -0.1 -4.7 Q4 09 ................... 2.4 -4.1 -4.5 0.0

Q1 10 ................... -7.3 -0.2 -4.5 -4.8 Q2 10 ................... 0.6 0.9 0.0 4.7 Q3 10 ................... 1.1 -0.1 -0.3 4.6 Q4 10 ................... 8.4 10.1 0.0 0.1

Q1 11 ................... -2.7 3.0 4.4 -5.7 Note: A negative net balance indicates that, overall, the institutions have tightened their credit policies, thus making it

more difficult to obtain loans, while a positive net balance indicates an overall easing of credit policies. The net balance indicates the institutions' assessment of quarter-on-quarter changes and not absolute changes. For a de-tailed presentation of the lending survey, see Carina Moselund Jensen and Tania Al-Zagheer Sass, Danmarks Na-tionalbank's Lending Survey – New Statistics for Changes in Banks' and Mortgage-Credit Institutes' Credit Policies, Danmarks Nationalbank, Monetary Review, 1st Quarter 2009.




SELECTED ITEMS FROM THE BALANCE SHEET OF INVESTMENT FUNDS Table 12

Assets Liabilities

Holdings of securities

Investment fund shares/units broken down by sector

Total balance

Bonds, etc.

Shares, etc.

House-holds

Insurance compa-nies and pension funds Other Abroad

End of period Kr. billion 2006 ................................... 924.7 431.8 385.4 294.3 289.4 305.3 28.8 2007 ................................... 1,020.7 477.9 411.6 295.2 336.8 322.1 29.2 2008 ................................... 773.2 425.3 222.5 211.4 266.9 238.1 14.6 2009 ................................... 865.5 487.5 301.4 252.7 357.8 185.1 22.7 2010 ................................... 1,286.9 765.2 384.9 299.0 653.0 234.9 25.3 Apr 10 ............................ 955.9 535.2 332.6 269.9 398.6 204.8 27.3 May 10 ............................ 967.1 554.7 313.5 268.2 412.7 198.7 27.0 Jun 10 ............................ 992.0 586.0 311.0 271.3 447.2 196.4 27.2 Jul 10 ............................ 1,010.0 591.9 322.0 276.2 454.9 200.9 27.0 Aug 10 ............................ 1,031.8 625.1 307.2 276.8 472.6 204.3 27.4 Sep 10 ............................ 1,115.1 676.1 319.7 281.9 539.1 210.0 26.7 Oct 10 ............................ 1,165.8 713.0 334.3 286.7 578.1 214.6 27.1 Nov 10 ............................ 1,217.2 729.5 360.7 291.1 606.4 218.9 27.5 Dec 10 ............................ 1,286.9 765.2 384.9 299.0 653.0 234.9 25.3 Jan 11 ............................ 1,294.8 768.7 388.3 299.5 652.9 237.2 26.5 Feb 11 ............................ 1,306.9 783.3 396.1 300.7 657.6 242.6 26.7 Mar 11 ............................ 1,289.4 775.9 385.7 299.1 657.3 240.5 26.5 Apr 11 ............................ 1,292.5 775.9 386.8 298.3 661.7 240.0 25.8




SECURITIES ISSUED BY RESIDENTS BY OWNER'S HOME COUNTRY Table 13

Bonds, etc.

of which:

Total Central-government

securities Mortgage-credit

bonds Shares

Denmark Abroad Denmark Abroad Denmark Abroad Denmark Abroad

End of period Market value, kr. billion

2006 ................... 2,541.3 464.7 380.1 172.6 2,034.9 285.9 989.4 361.8 2007 ................... 2,701.2 475.8 301.9 176.2 2,247.1 287.7 996.1 445.4 2008 ................... 2,981.5 405.0 363.1 158.5 2,419.2 227.4 529.9 244.4 2009 ................... 3,415.2 431.4 394.2 159.8 2,803.0 251.7 641.0 347.5 2010 ................... 3,540.3 549.9 474.2 172.9 2,834.8 352.7 784.4 545.7 Apr 10 ............. 2,767.4 507.3 440.2 181.1 2,117.4 307.1 739.2 435.8 May 10 ............. 2,864.3 490.5 473.7 177.9 2,174.6 293.7 666.3 445.0 Jun 10 ............. 2,977.3 495.3 486.2 191.1 2,261.3 282.5 670.5 463.9 Jul 10 ............. 2,931.1 527.1 483.3 193.9 2,188.1 312.3 688.3 475.6 Aug 10 ............. 3,001.6 537.6 500.2 213.4 2,243.2 301.6 652.7 460.3 Sep 10 ............. 3,075.1 532.7 494.5 207.6 2,348.9 299.3 682.9 491.9 Oct 10 ............. 2,941.1 544.0 483.6 195.8 2,227.1 322.2 718.9 518.5 Nov 10 ............. 3,176.6 494.1 471.0 179.3 2,479.3 290.4 725.5 522.0 Dec 10 ............. 3,540.3 549.9 474.2 172.9 2,834.8 352.7 784.4 545.7 Jan 11 ............. 2,772.1 597.2 462.3 190.0 2,086.0 384.1 789.0 543.8 Feb 11 ............. 2,790.8 583.2 462.3 195.7 2,108.8 366.0 793.1 560.6 Mar 11 ............. 2,926.0 583.1 449.5 196.1 2,259.2 367.2 772.5 553.9 Apr 11 ............. 2,775.9 592.6 462.1 200.6 2,099.9 369.7 781.2 554.5 Note: Comprise quoted and unquoted securities registered with the VP Securities Services (VP).




HOUSEHOLDS' FINANCIAL ASSETS AND LIABILITIES Table 14

Assets Liabilities

Currency and bank

deposits, etc.

Bonds, etc.

Shares and

certific-ates

issued by invest-ment

associa-tions, etc.

Life-insurance

and pension-scheme savings,

etc. Total Loans,

etc.

Net financial

assets Total


2006 ................... 839 181 1,560 1,681 4,260 2,075 2,185 4,260 2007 ................... 902 188 1,446 1,723 4,258 2,255 2,004 4,259 2008 ................... 905 178 794 1,787 3,665 2,415 1,250 3,665 2009 ................... 925 171 1,004 1,923 4,023 2,532 1,491 4,023 2010 ................... 950 153 1,215 2,117 4,435 2,663 1,772 4,435 Q4 09 ................ 925 171 1,004 1,923 4,023 2,532 1,491 4,023 Q1 10 ................ 933 164 1,089 2,009 4,196 2,574 1,621 4,195 Q2 10 ................ 942 155 1,060 2,102 4,259 2,601 1,659 4,260 Q3 10 ................ 933 153 1,106 2,177 4,369 2,617 1,752 4,369 Q4 10 ................ 950 153 1,215 2,117 4,435 2,663 1,772 4,435




COMPANIES' FINANCIAL ASSETS AND LIABILITIES Table 15

Assets Liabilities

Debt

Curren-cy, bank deposits

and granted credits,

etc. Bonds,

etc.

Shares and

certific-ates

issued by invest-ment

associa-tions, etc. Total

Loans, etc.

Bonds, etc.

issued

Shares, etc.

issued

Net financial

assets Total


2006 ............ 817 148 3,082 4,046 1,580 139 4,428 -2,101 4,046 2007 ............ 891 133 2,922 3,946 1,727 118 4,281 -2,180 3,946 2008 ............ 1,037 104 1,766 2,907 1,942 109 2,506 -1,650 2,907 2009 ............ 1,036 104 2,138 3,278 1,892 138 2,946 -1,699 3,278 2010 ............ 1,173 124 2,544 3,841 1,933 142 3,620 -1,854 3,841 Q4 09 ......... 1,036 104 2,138 3,278 1,892 138 2,946 -1,699 3,278 Q1 10 ......... 1,053 112 2,340 3,504 1,935 137 3,223 -1,791 3,504 Q2 10 ......... 1,090 105 2,257 3,453 1,968 129 3,135 -1,779 3,453 Q3 10 ......... 1,093 109 2,298 3,500 1,961 132 3,245 -1,837 3,500 Q4 10 ......... 1,173 124 2,544 3,841 1,933 142 3,620 -1,854 3,841 Note: Companies are defined as non-financial companies.




CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS (NET REVENUES) Table 16

Goods (fob) Services

Goods and services

Wages and property income

Current transfers

Total current account

Kr. billion

2006 ................................... 18.2 42.0 60.2 16.8 -28.4 48.6 2007 ................................... 2.1 40.3 42.5 9.7 -29.2 23.0 2008 ................................... 4.2 51.6 55.8 18.2 -27.8 46.2 2009 ................................... 42.7 23.6 66.4 21.0 -28.4 59.0 2010 ................................... 50.7 46.5 97.1 23.4 -30.7 89.9 May 09 - Apr 10 ................ 55.4 25.4 80.8 17.7 -28.9 69.6

May 10 - Apr 11 ................ 53.4 48.5 101.9 30.3 -30.0 102.2 Apr 10 ............................. 3.8 4.9 8.7 1.1 -2.2 7.6 May 10 ............................. 1.7 3.3 5.0 3.1 -2.3 5.8 Jun 10 ............................. 3.6 4.4 8.1 1.9 -2.3 7.7 Jul 10 ............................. 7.1 3.4 10.5 1.2 -2.2 9.5 Aug 10 ............................. 3.6 6.1 9.7 1.1 -2.3 8.6 Sep 10 ............................. 5.7 5.0 10.7 3.4 -2.3 11.8 Oct 10 ............................. 3.9 4.7 8.7 3.4 -2.1 9.9 Nov 10 ............................. 5.0 5.0 10.0 3.3 -2.0 11.3 Dec 10 ............................. 1.1 4.5 5.6 2.7 -2.1 6.2 Jan 11 ............................. 4.9 2.8 7.7 3.7 -3.8 7.6 Feb 11 ............................. 4.3 2.4 6.7 2.9 -3.5 6.2 Mar 11 ............................. 7.1 3.0 10.1 0.4 -3.0 7.6 Apr 11 ............................. 5.3 3.8 9.1 3.2 -2.2 10.1




FINANCIAL ACCOUNT OF THE BALANCE OF PAYMENTS (NET PAYMENTS FROM ABROAD) Table 17

Capital import

Direct investments

Current account

and capital

account, etc., total

Danish abroad

Foreign in Denmark

Portfolio invest-ments 1

Other capital import Other 2

Danmarks National-

bank's transac-

tions with abroad3

Kr. billion 2006 ................................... 48.6 -50.2 16.1 -103.3 83.4 -33.0 -38.3 2007 ................................... 23.3 -112.3 64.3 -32.0 56.5 -1.0 -1.2 2008 ................................... 46.6 -72.1 11.4 53.0 -66.7 -43.5 -71.4 2009 ................................... 58.8 -36.9 15.9 74.3 195.4 -19.4 288.0 2010 ................................... 90.5 -17.7 -1.9 -5.8 73.5 -112.1 26.5 May 09 - Apr 10 ................ 69.6 -32.2 11.6 32.5 130.6 -65.0 147.2

May 10 - Apr 11 ................ 102.9 -26.0 -4.8 73.4 -18.0 -78.8 48.6 Apr 10 ............................. 7.7 -8.3 5.4 43.7 -52.6 -9.7 -13.8 May 10 ............................. 5.8 -2.3 14.1 -10.0 23.6 3.5 34.7 Jun 10 ............................. 7.7 -4.9 -0.4 29.5 -22.1 -19.5 -9.7 Jul 10 ............................. 9.5 -9.5 4.5 19.1 -2.7 -26.9 -6.0 Aug 10 ............................. 8.6 1.5 2.7 -22.9 3.7 9.7 3.3 Sep 10 ............................. 11.9 -8.3 4.3 -69.3 88.5 -24.8 2.3 Oct 10 ............................. 10.0 29.2 -11.6 15.0 -50.9 1.2 -7.1 Nov 10 ............................. 11.4 -11.1 26.0 -65.4 35.4 5.7 2.0 Dec 10 ............................. 6.2 14.5 -43.5 97.1 -43.8 -30.4 0.1 Jan 11 ............................. 7.6 -9.5 -6.5 19.4 -28.0 18.3 1.2 Feb 11 ............................. 6.2 -11.4 -2.0 16.9 -12.5 20.0 17.2 Mar 11 ............................. 7.6 -2.8 4.0 12.7 -8.9 -4.2 8.5 Apr 11 ............................. 10.2 -11.5 3.8 31.3 -0.4 -31.3 2.0 1 This item may differ from the total of Table 18, as portfolio investments are published 1-2 weeks earlier than the rest

of the balance of payments. 2 Including errors and omissions. 3 Including transactions on all Danmarks Nationalbank's accounts with abroad and not only transactions on accounts

included by compilation of the foreign-exchange reserve. The latter is published by press release on the 2nd banking day of each month and included in Table 2 of this section.




PORTFOLIO INVESTMENTS OF THE BALANCE OF PAYMENTS (NET PAYMENTS FROM ABROAD) Table 18

Danish securities Foreign securities

Krone-denominated

bonds, etc.

Foreign currency

denominated bonds,

etc. Shares Bonds,

etc. Shares Total 1 Kr. billion

2006 ...................... 16.3 70.0 -34.4 -21.5 -133.8 -103.3 2007 ...................... 26.2 73.1 15.0 -96.0 -49.8 -31.5 2008 ...................... -59.1 141.2 11.4 -91.1 50.7 53.0 2009 ...................... -5.6 162.6 43.1 -83.4 -42.4 74.3 2010 ...................... 79.0 -34.5 41.0 -57.0 -34.3 -5.8 Apr 10 ............... 27.7 16.8 2.2 0.4 -3.3 43.7 May 10 ............... -13.4 -17.8 -1.2 23.2 -0.8 -10.0 Jun 10 ............... 6.2 25.8 6.5 -7.3 -1.7 29.5 Jul 10 ............... 25.3 3.2 -3.3 0.3 -6.5 19.1 Aug 10 ............... 14.0 -45.9 1.0 5.1 2.9 -22.9 Sep 10 ............... 5.3 -94.3 3.0 14.6 2.1 -69.3 Oct 10 ............... 19.1 9.8 9.5 -17.5 -5.9 15.0 Nov 10 ............... -26.0 -12.9 -0.9 -20.0 -5.6 -65.4 Dec 10 ............... 17.3 68.9 12.3 10.4 -11.8 97.1 Jan 11 ............... 47.5 -3.9 0.7 -13.1 -11.8 19.4 Feb 11 ............... -6.4 35.8 -2.3 -7.6 -2.6 16.9 Mar 11 ............... 4.2 11.3 0.4 2.4 -5.7 12.7 Apr 11 ............... -2.1 16.0 8.7 12.7 -4.1 31.3

Note: A negative sign (-) indicates residents' net purchase of foreign securities, or non-residents' net sale of Danish securities.

1 This item may differ from "Portfolio investments" in Table 17, as the rest of the balance of payments is published 1-2 weeks later.




DENMARK'S EXTERNAL ASSETS AND LIABILITIES Table 19

Direct investments

Portfolio investments Other investments

Equity

Inter-compa-ny debt,

etc. Shares,

etc. Bonds,

etc.

Finan-cial

deriva-tives, net

Trade credits

Loans and

deposits Other

Dan-marks Natio-

nalbank Total


Assets

2006 ............ 579 260 746 678 47 41 823 30 178 3,383 2007 ............ 651 287 794 733 0 47 1,035 32 176 3,755 2008 ............ 643 378 448 782 84 45 1,101 37 226 3,744 2009 ............ 718 375 608 925 23 38 927 32 400 4,044 2010 ............ 837 404 739 1,031 39 45 989 32 432 4,550 Q4 09 ......... 718 375 608 925 23 38 927 32 400 4,044 Q1 10 ......... 779 388 652 1,014 41 43 987 34 423 4,362 Q2 10 ......... 821 405 648 1,031 70 46 968 32 483 4,503 Q3 10 ......... 794 423 662 1,024 90 46 1,067 34 474 4,614 Q4 10 ......... 837 404 739 1,031 39 45 989 32 432 4,550 Liabilities

2006 ............ 482 270 356 1,066 • 32 1,142 35 4 3,386 2007 ............ 543 276 422 1,123 • 36 1,409 37 5 3,851 2008 ............ 507 295 242 1,198 • 42 1,398 40 121 3,842 2009 ............ 478 302 348 1,361 • 35 1,402 38 5 3,969 2010 ............ 514 290 520 1,451 • 40 1,523 39 5 4,383 Q4 09 ......... 478 302 348 1,361 • 35 1,402 38 5 3,969 Q1 10 ......... 486 300 411 1,410 • 30 1,576 42 2 4,256 Q2 10 ......... 514 309 431 1,506 • 34 1,496 39 42 4,371 Q3 10 ......... 519 304 454 1,381 • 37 1,660 41 37 4,434 Q4 10 ......... 514 290 520 1,451 • 40 1,523 39 5 4,383 Net assets

2006 ............ 98 -11 390 -387 47 10 -319 -5 174 -3 2007 ............ 108 12 372 -390 0 11 -374 -5 171 -96 2008 ............ 136 84 206 -416 84 3 -297 -3 105 -99 2009 ............ 240 73 260 -437 23 3 -476 -6 395 76 2010 ............ 322 114 219 -420 39 5 -534 -7 428 167 Q4 09 ......... 240 73 260 -437 23 3 -476 -6 395 76 Q1 10 ......... 293 88 242 -396 41 13 -588 -8 421 106 Q2 10 ......... 306 96 217 -475 70 12 -527 -7 441 132 Q3 10 ......... 276 119 208 -357 90 8 -593 -7 437 181 Q4 10 ......... 322 114 219 -420 39 5 -534 -7 428 167 Note: As a key principle, the market value has been used for the compilation.




GDP BY TYPE OF EXPENDITURE Table 20

Final domestic demand

GDP

Private consump-

tion

General-govern-

ment consump-

tion

Gross fixed

capital formation

Change in invent-ories Total

Exports of goods

and services

Imports of goods

and services

Kr. billion

2006 ................... 1,631.7 786.6 422.6 356.0 14.6 1,579.8 849.6 797.7 2007 ................... 1,695.3 820.4 440.0 371.4 24.8 1,656.5 885.2 846.5 2008 ................... 1,740.8 840.3 464.8 365.5 15.2 1,685.7 959.0 903.8 2009 ................... 1,656.1 813.6 496.3 303.4 -20.3 1,592.9 792.8 729.6 2010 ................... 1,746.3 853.2 513.5 287.4 -5.3 1,648.8 881.0 783.6 Q1 10 ................ 416.6 208.9 125.5 65.8 -3.5 396.6 200.5 180.5 Q2 10 ................ 437.2 210.9 128.9 74.0 1.8 415.6 220.3 198.7 Q3 10 ................ 439.5 209.1 128.1 70.9 -0.1 408.1 231.0 199.5 Q4 10 ................ 453.0 224.3 131.0 76.7 -3.5 428.5 229.4 204.9 Q1 11 ................ 427.6 212.7 126.3 64.4 0.6 403.9 229.2 205.5 Real growth compared with previous year, per cent 2006 ................... 3.4 3.6 2.8 14.2 ... 5.2 9.0 13.4 2007 ................... 1.6 3.0 1.3 0.4 ... 2.3 2.8 4.3 2008 ................... -1.1 -0.6 1.6 -3.2 ... -1.2 2.8 2.7 2009 ................... -5.2 -4.5 3.1 -14.3 ... -6.5 -9.7 -12.5 2010 ................... 2.1 2.2 1.0 -3.9 ... 1.7 3.6 2.9 Q1 10 ................ -0.7 2.9 1.7 -16.4 ... -1.4 -2.0 -3.5 Q2 10 ................ 2.5 1.6 2.2 1.0 ... 3.7 3.1 5.6 Q3 10 ................ 3.5 1.9 0.6 -1.7 ... 2.4 6.0 3.7 Q4 10 ................ 3.0 2.5 -0.2 2.3 ... 2.1 7.3 5.7 Q1 11 ................ 1.1 -0.8 -1.2 -3.1 ... -0.3 10.3 8.3

Real growth compared with previous quarter (seasonally adjusted),

per cent

Q1 10 ................ 1.2 2.3 0.0 -2.9 ... 0.3 1.5 -0.3 Q2 10 ................ 0.9 -1.0 0.7 6.8 ... 2.1 2.1 4.8 Q3 10 ................ 1.1 0.3 -0.5 -1.5 ... -0.3 2.9 -0.1 Q4 10 ................ -0.2 0.8 -0.4 0.5 ... 0.0 0.7 1.3 Q1 11 ................ -0.5 -0.8 -0.8 -8.3 ... -1.9 4.3 2.1




EU-HARMONIZED INDEX OF CONSUMER PRICES (HICP) AND UNDERLYING INFLATION (IMI) Table 21

HICP Index of net retail prices1

Subcomponents:

Administered prices Split into4:

Total Energy Food

Core infla-tion2 Rent

Public services

HICP excl.

energy, foodand

admini-stered prices3

Index of net retail

prices excl.

energy, food and

admini-stered prices3

Import content5 IMI6

Weights, per cent

100 10.4 17.4 72.2 7.4 3.9 60.9 53.2 16.8 36.4

Year-on-year growth, per cent

2006 .............. 1.9 5.3 2.2 1.2 2.1 0.9 1.1 1.3 3.1 0.4 2007 .............. 1.7 0.3 3.7 1.3 2.1 0.6 1.2 1.4 1.4 1.4 2008 .............. 3.6 7.7 6.7 2.1 2.8 3.5 1.9 2.1 4.0 1.1 2009 .............. 1.1 -4.0 0.5 2.0 3.1 4.8 1.7 1.9 -4.3 5.1 2010 .............. 2.2 9.2 2.1 1.2 2.8 3.9 0.8 0.9 1.7 0.5

Q1 08 .......... 3.2 7.5 6.0 1.7 2.2 2.4 1.6 2.0 3.6 1.2 Q2 08 .......... 3.7 9.7 7.4 1.7 2.6 4.0 1.4 1.8 4.2 0.6 Q3 08 .......... 4.6 10.4 8.6 2.5 3.9 3.7 2.2 2.2 5.0 0.9 Q4 08 .......... 3.0 3.1 5.0 2.4 2.4 3.8 2.3 2.3 3.2 1.8

Q1 09 .......... 1.7 -4.6 3.2 2.2 2.7 4.2 2.0 2.3 -1.9 4.4 Q2 09 .......... 1.1 -5.5 0.7 2.2 3.1 5.0 1.9 2.1 -4.2 5.2 Q3 09 .......... 0.6 -5.9 -0.5 2.0 3.5 5.1 1.6 1.9 -6.0 6.0 Q4 09 .......... 0.9 0.3 -1.5 1.6 2.9 4.9 1.2 1.6 -5.0 4.9

Q1 10 .......... 1.9 8.9 0.0 1.4 2.9 3.7 1.0 1.2 -1.3 2.3 Q2 10 .......... 2.0 10.1 0.8 1.1 2.8 3.9 0.7 0.7 1.0 0.6 Q3 10 .......... 2.3 8.8 3.2 1.1 2.5 4.0 0.8 0.9 3.2 -0.2 Q4 10 ........... 2.5 9.1 4.5 1.1 2.9 4.0 0.7 0.8 3.8 -0.6

Q1 11 ........... 2.6 9.3 3.4 1.4 2.9 3.7 1.0 0.8 5.4 -1.3

Note: The weights reflect the weighting basis as of January 2009. 1 Prices in the index of net retail prices are compiled excluding indirect taxes and subsidies.

2 Core inflation is defined as the increase in HICP excluding energy and food. 3 Goods and services excluding energy, food and administered prices constitute 60.9 per cent of HICP's weight basis and

53.2 per cent of the index of net retail prices. The difference reflects that the same goods and services do not count equally in the two indices, and does not express the indirect taxation content of the consumer prices.

4 The division of the index of net retail prices into import and IMI is based on Statistics Denmark's input-output table. 5 The indirect energy content is included in the import content. 6 IMI expresses the domestic market-determined inflation. For a detailed presentation of IMI, see Bo William Hansen and

Dan Knudsen, Domestic Market-Determined Inflation, Danmarks Nationalbank, Monetary Review, 4th Quarter 2005.




SELECTED MONTHLY ECONOMIC INDICATORS Table 22

Unemployment

Per cent of labour force Quantity index

Composite cyclical Indica-tor for

Forced sales of

real property

New passenger car regis-trations

Con-sumer confi-dence indica-

tor

Manu-factur-

ing industry

Building and con-

struction Service

Gross 1 Net

Manu-factu-ring industry 2

2005=100

Retail trade

2005=100 Number Balance per cent

2006 .......... ... 3.9 105.7 103.5 1,231 156,719 10.5 9 21 24 2007 .......... 3.7 2.8 107.0 104.9 1,392 162,481 7.5 5 9 20 2008 .......... 2.7 1.9 106.7 101.7 2,840 150,663 -7.7 -7 -16 3 2009 .......... 4.7 3.5 88.2 97.0 4,140 112,249 -5.0 -17 -44 -13 2010 .......... 6.0 4.2 90.6 96.7 5,222 153,609 1.8 3 -35 4 Seasonally adjusted

May 10 .... 6.0 4.1 90.8 96.5 468 13,003 1.5 7 -33 6 Jun 10 .... 6.0 4.2 95.5 96.3 447 12,582 -1.7 5 -35 7 Jul 10 .... 6.2 4.2 94.9 96.2 440 12,353 3.5 4 -33 4 Aug 10 .... 6.1 4.1 91.0 95.6 383 13,153 4.8 3 -32 3 Sep 10 .... 6.1 4.2 94.3 96.1 418 13,525 2.1 4 -28 5 Oct 10 .... 6.2 4.2 91.2 96.5 441 13,714 1.2 0 -32 4 Nov 10 .... 6.1 4.1 90.6 96.8 406 14,332 2.5 -3 -33 8 Dec 10 .... 6.1 4.1 89.7 96.4 421 13,792 1.8 -1 -31 3 Jan 11 .... 6.0 4.0 94.7 97.0 427 14,588 1.9 6 -32 8 Feb 11 .... 5.9 3.9 90.6 96.4 431 13,982 0.8 5 -21 11 Mar 11 .... 5.9 3.9 92.5 96.6 388 14,416 1.5 3 -15 7 Apr 11 .... 5.8 3.8 94.8 97.5 408 12,878 0.0 10 -19 14 May 11 .... ... ... ... ... 407 ... 1.0 12 -16 8 1 Including persons in activation programmes. 2 Excluding shipbuilding.




SELECTED QUARTERLY ECONOMIC INDICATORS Table 23

Employment Hourly earnings

Total Private

All sectors in

Denmark, total

Manufac-turing

industryin Denmark

Manufac-turing

industry abroad

1,000 persons 1996=100

Property prices

(purchase sum, one-

family dwellings)

As a per-

centage of property

value 2006

2006 ................................... 2,825 1,980 145.7 146.1 134.2 100.3 2007 ................................... 2,903 2,061 151.4 152.1 138.4 104.8 2008 ................................... 2,958 2,120 158.0 158.6 143.0 100.1 2009 ................................... 2,866 2,016 162.9 163.2 145.7 88.1 2010 ................................... 2,806 1,946 166.6 167.3 149.5 90.2 Seasonally adjusted

Q1 10 ................................ 2,809 1,949 165.6 166.4 149.1 88.6 Q2 10 ................................ 2,817 1,955 166.0 166.7 148.9 90.9 Q3 10 ................................ 2,804 1,942 167.0 168.1 149.8 91.2 Q4 10 ................................ 2,797 1,941 167.7 169.0 150.4 90.2 Q1 11 ................................ 2,794 1,942 ... 170.1 152.1 ... Change compared with previous year, per cent

2006 ................................... 2.1 2.9 3.1 3.1 2.7 21.6 2007 ................................... 2.8 4.1 3.8 4.0 3.2 4.6 2008 ................................... 1.9 2.9 4.4 4.2 3.3 -4.5 2009 ................................... -3.1 -4.9 3.1 2.9 1.9 -12.0 2010 ................................... -2.1 -3.4 2.3 2.5 2.6 2.4 Q1 10 ................................ -4.0 -6.3 2.5 2.7 3.2 1.3 Q2 10 ................................ -2.3 -3.9 2.2 2.6 2.6 3.4 Q3 10 ................................ -1.4 -2.4 2.2 2.5 2.4 2.9 Q4 10 ................................ -0.5 -0.7 2.2 2.4 2.3 2.2 Q1 11 ................................ -0.5 -0.4 ... 2.2 2.0 ...




EXCHANGE RATES Table 24

EUR USD GBP SEK NOK CHF JPY

Kroner per 100 units

Average

2006 ................................... 745.91 594.70 1,094.32 80.62 92.71 474.22 5.1123 2007 ................................... 745.06 544.56 1,089.81 80.57 92.99 453.66 4.6247 2008 ................................... 745.60 509.86 939.73 77.73 91.02 469.90 4.9494 2009 ................................... 744.63 535.51 836.26 70.18 85.39 493.17 5.7296 2010 ................................... 744.74 562.57 869.02 78.15 93.02 540.60 6.4299 May 10 ............................ 744.16 591.90 868.22 76.97 94.26 524.43 6.4246 Jun 10 ............................ 744.09 609.55 899.03 77.74 94.12 540.65 6.7050 Jul 10 ............................ 745.22 583.72 891.83 78.49 92.92 553.71 6.6710 Aug 10 ............................ 744.95 577.90 904.51 79.07 93.91 555.68 6.7733 Sep 10 ............................ 744.76 570.26 886.92 80.74 94.09 569.07 6.7591 Oct 10 ............................ 745.67 536.57 850.91 80.36 91.93 554.34 6.5603 Nov 10 ............................ 745.47 545.99 871.93 80.02 91.51 554.70 6.6164 Dec 10 ............................ 745.28 563.81 879.47 82.23 94.22 580.90 6.7607 Jan 11 ............................ 745.18 558.00 879.82 83.62 95.30 583.22 6.7529 Feb 11 ............................ 745.55 546.27 880.93 84.84 95.34 574.71 6.6116 Mar 11 ............................ 745.74 532.75 860.72 83.93 95.26 579.63 6.5200 Apr 11 ............................ 745.74 516.75 844.58 83.10 95.52 574.38 6.1913 May 11 ............................ 745.66 519.65 849.47 83.24 95.13 594.77 6.4033




EFFECTIVE KRONE RATE Table 25

Consumer-price indicesNominal effective

krone rate Denmark Abroad

Real effective

krone rate based on consumer

prices

Real effective

krone rate based on

hourly earnings

Consumer-price index

in the euro area

Average 1980=100 2005=100

2006 ................................... 101.6 246.2 233.4 107.3 110.3 102.2 2007 ................................... 103.2 250.5 238.7 108.3 112.7 104.4 2008 ................................... 105.8 259.0 246.9 111.1 116.8 107.8 2009 ................................... 107.8 262.4 247.2 114.9 120.6 108.1 2010 ................................... 104.0 268.4 251.4 111.7 116.4 109.8 May 10 ............................. 103.3 268.6 251.4 111.4 ... 110.0 Jun 10 ............................. 102.2 268.2 251.4 110.2 116.0 110.0 Jul 10 ............................. 102.9 268.2 251.3 110.8 ... 109.7 Aug 10 ............................. 102.8 269.0 251.5 110.7 ... 109.9 Sep 10 ............................. 102.8 270.1 252.1 110.9 115.5 110.1 Oct 10 ............................. 104.4 269.9 252.6 111.9 ... 110.5 Nov 10 ............................. 103.9 270.1 252.9 111.4 ... 110.6 Dec 10 ............................. 102.7 270.3 254.3 109.9 116.2 111.3 Jan 11 ............................. 102.5 270.6 254.2 109.7 ... 110.5 Feb 11 ............................. 102.9 273.9 255.5 110.7 ... 111.0 Mar 11 ............................. 103.8 275.4 257.1 111.4 114.9 112.5 Apr 11 ............................. 104.7 276.5 ... ... ... 113.1 May 11 ............................. 104.3 ... ... ... ... ...


2006 ................................... 0.0 1.9 2.1 -0.1 0.6 2.2 2007 ................................... 1.6 1.7 2.3 0.9 2.2 2.2 2008 ................................... 2.5 3.4 3.4 2.6 3.6 3.3 2009 ................................... 1.9 1.3 0.1 3.5 3.2 0.3 2010 ................................... -3.6 2.3 1.7 -2.8 -3.4 ... May 10 ............................. -3.9 2.2 1.8 -3.2 ... 1.6 Jun 10 ............................. -5.4 1.7 1.6 -4.5 -3.7 1.4 Jul 10 ............................. -4.6 2.3 1.7 -3.7 ... 1.7 Aug 10 ............................. -4.3 2.3 1.6 -3.2 ... 1.6 Sep 10 ............................. -4.8 2.6 1.8 -3.6 -4.1 1.8 Oct 10 ............................. -3.7 2.5 1.9 -3.1 ... 1.9 Nov 10 ............................. -4.2 2.6 2.0 -3.3 ... 1.9 Dec 10 ............................. -5.0 2.8 2.2 -4.0 -3.9 2.2 Jan 11 ............................. -4.2 2.7 2.4 -3.6 ... 2.3 Feb 11 ............................. -2.7 2.7 2.5 -2.5 ... 2.4 Mar 11 ............................. -1.6 2.7 2.7 -1.7 -2.6 2.7 Apr 11 ............................. -0.1 2.9 ... ... ... 2.8 May 11 ............................. 1.0 ... ... ... ... ... Note: The nominal effective krone rate index is a geometric weighting of the development in the Danish krone rate

against currencies of Denmark's 27 most important trading partners. However, only 25 countries are included inthe calculation of consumer prices abroad and the real effective krone rate based on consumer prices and hourlyearnings, respectively.

As from April 2010 the weights are based on trade in manufactured goods in 2009 and earlier on trade in manu-factured goods in 2002.

An increase in the index reflects a nominal or a real appreciation of the krone.




Danmarks Nationalbank's Statistical Publications

Periodical electronic publications Danmarks Nationalbank releases new financial statistics to the public in electronic publications composed of 2 elements: "Nyt" (News) describing the key development trends. Tabeltillæg (Tables Supplement) containing tables with as detailed

specifications as possible. "Nyt" is available in Danish only, whereas the tables supplement and the corresponding sources and methodologies also are available in English. Statistics databank The above publications are supplemented by a statistics database com-prising all time series which are updated concurrent with a release. The time series include data as far back in time as possible. The statistical data from Danmarks Nationalbank are published through Statistics Denmark's "StatBank Denmark". Danmarks Nationalbank's part of the "StatBank Denmark" is available directly via: nationalbanken.statbank.dk Special Reports Special Reports deal with statistics of a thematic character and are not prepared on a regular basis. Release calendar A release calendar for the statistical publications, covering the current month and the following quarter, is available on: www.nationalbanken.dk (see Statistics > Release calendar).


danmarks nationalbank nationalbank monetary …monetary review 2nd quarter 2011 the small picture on...

Documents