The Land Below Zero: Where Negative Interest Rates Are
Normal
Denmark has been an upside-down world for longer than any
other country. The sky hasn't fallen yet.
Article by-Mathew Campbell and Peter Levring from Bloomberg Markets
Vivek Gupta
109KB
http://www.bloomberg.com/news/articles/2016-06-06/denmark-land-below-zero-where-negative-intere
st-rates-are-normal
Denmark
Denmark's nominal GDP was
estimated to be $333 billion,
the32nd largest in the world
Scandinavias third-largest
economy
Minimum wage approximately $20
an hour
Unemployment is almost the lowest
Negative interest rates since 2012
Current interest rate -0.65%
Population is 5 million
Why Denmark is using a negative interest rate
as a currency tool?
Denmarks currency, the krone, was
pegged to the deutsche mark from 1982
to 1999, and to the euro thereafter.
Maintaining the peg is the sole mandate
of the Danish central bank, so crucial is it
to the economy.
As the European debt crisis reached one
of its periodic heights in 2012, investors
seeking a safe haven piled cash into
Denmark, threatening to push the krone
out of its trading band. The benchmark
deposit rate was already at 0.05 percent,
leaving nowhere to go but down to reduce
the countrys appeal to hot money.
Denmark thus resorted tonegative rates
not to spur inflationas Japan is trying to
do, unsuccessfullybut todrive away
speculators.
Denmark's National bank Governor Lars Rohde says in his own words Denmarks choice is
simple: The peg must be protected, and negative rates are doing that without great disruption.
The central bank will do whatever it takes to defend the peg, Theres no sharp, disruptive
movement when you pass below zero. Its just working like very low interest rates.
Dilemmas faced by Lawmakers and
Private depositors
To legalise the taxation of interest earnings of the mortgage
borrowers as income
Advance tax payments. Businesses that prepay their taxes in
Denmark receive modest interest on the deposits, which is credited
against what they owe or are refunded. With no limits on
prepayments, they might start using the taxman as an unofficial
bank. Rules had to be hastily struck to limit how much a business
could deposit, removing the dodge before anyone took significant
advantage of it.
Negative rates have driven up the price of owning a piece of this
urban vitality. Apartment prices per square meter soared 43
percent between the start of 2010 and the end of 2015, according
to real estate broker Home. This calls for a strict regulations.
Conclusions
Karsten Beltofts, chief executive officer of the Danish Mortgage
Banks Federation, concern: What happens if negative rates move
from medium-term peculiarity to long-term reality, reversing the
fundamental principles of debt and savings in a way that makes the
change seem permanent?
Jesper Berg, Banking regulator, puts his apprehension about staying
below zero indefinitely in terms that Danes can easily understand
he says. The further you go out, and the longer you stay there, the
more problems you can run into.
Why negative interest rate is not good
in a long run?
Much of the institutional setup for providing financial services to
millions in systemically important advanced economies was not
designed to operate for long with negative nominal interest rates
Negative interest rates may compel a growing number of
individuals to disengage from a financial system
Instability and disrupt in the market
Thank You!
