DENMARK: FEBRUARY ECONOMIC HIGHLIGHTS

UNCLAS SECTION 01 OF 02 COPENHAGEN 000105 SIPDIS STATE FOR EEB/IFD/OMA TREASURY FOR VIMAL ATUKOROLA COMMERCE FOR PAUL BUCHER E.O. 12958: N/A TAGS: ECON EFIN ETRD ELAB KTDB PGOV DA SUBJECT: DENMARK: FEBRUARY ECONOMIC HIGHLIGHTS REF: COPENHAGEN 51 (BANK BAIL-OUT PLAN) Contents -------------- EFIN: Bleak Days for Financial Sector ECON: Tax Reform Moves Forward ECON: Leading Economists Spout Gloom and Doom ECON: Worst GDP Numbers in more than 50 Years ETRD: Exports Lagging EAIR: SAS Launches New Strategy Bleak Days for Financial Sector -------------- ¶1. 2008 was a dreadful year for the Danish financial sector, and 2009 has thus far shown no indication that it will be any better. Most large Danish financial firms came out of 2008 with a loss or, at best, reduced profits compared to 2007. The largest Danish bank, Danske Bank, ended 2008 with a meager net profit that was 1/15 the size of its 2007 profit due to a hefty non-performing loan portfolio. The largest pension fund, ATP, had losses of DKK 25.7 billion (approx USD 4.42 billion) in 2008 compared to a profit of DKK 2.9 billion (approx USD 498.3 million) in ¶2007. 21 out of 22 Danish banks had double-digit profit reductions in 2008. Many companies also had to make considerable write-offs from the books, a sure-fire signal of tough years ahead. ¶2. The avalanche of bad financial sector news has given rise to doubts as to whether the Danish government's recent bank bail-out package will suffice in stabilizing the Danish bank sector (reftel) or whether yet another bank package will be needed. Minister for Economic and Business Affairs Lene Espersen claims that there will be no need for a new bank package, though she is contemplating extra help to the exporting sector beyond an already-allotted DKK 20 billion (approx USD 3.44 billion). The government is also under pressure to formulate an overall economic stimulus package that goes beyond tax cuts, and the left-of-center opposition has already unveiled several proposals that call for massive public-sector spending. Tax Reform Moves Forward -------------- ¶3. In order to forestall opposition demands for a massive economic stimulus package, Danish the government is seeking to push a tax reform package through Parliament as an alternative. With the stated aim of reducing personal income tax (Danes are among the most heavily-taxed people in the world),the government proposal would reduce the tax on ;the wealthiest segment of Danish society from 63 to about 56 percent. Reductions will also be made through more modest but still significant cuts for middle-class and low-income taxpayers. The reform is expected to be underfinanced until 2015 in an effort to stimulate the Danish economy, and is projected to add 19,000 new jobs. The opposition has been predictably dismissive of the proposal, with Social Democrat leader Helle Thorning-Schmidt stating that it is a plan that merely allows the rich to buy more red wine and flat-screen televisions and take more lavish holidays. Leading Economists Spout Gloom and Doom -------------- ¶4. Seven leading economists, including the current Chair of the Danish Economic Council and two of his predecessors, are predicting dire consequences for the Danish economy due to the current crisis and are echoing opposition calls for a stimulus package to help the economy. They maintain that the Economic Council's bleak and negative projections from last November were not sufficiently pessimistic, and they now project negative GDP growth of 1.3 percent in both 2009 and 2010, and unemployment rising to double digits by 2011, which is the earliest year a recovery can be expected. The chief economist from a leading Danish bank has sounded an even more dire prediction of about 13 percent unemployment (Note: Danish unemployment has risen sharply in the past two months and the EU-harmonized unemployment rate currently stands at about 4 percent). Yet another former head of the Danish Economic Council argues that the downturn might last 5 to 7 years before Denmark once again sees positive GDP growth. Most economists agree that a growth package of at least 1 percent of GDP (DKK 16 billion (approx USD 2.75 COPENHAGEN 00000105 002 OF 002 billion)) is needed, combining public investment, unfinanced tax cuts, and an active labor market policy. Worst GDP Numbers in More than 50 Years -------------- ¶5. Denmark's seasonally adjusted GDP contracted by 2.0 percent from third-quarter to fourth-quarter in 2008. Expectations ranged from a drop of 0.8 to 1.5 percent so the actual number was much worse than anticipated. For the year 2008 as a whole, GDP contracted by 1.3 percent. Compared to fourth-quarter 2007, fourth-quarter 2008 GDP was 3.9 percent lower. The large contraction was generated by major drops in investment (3.9 percent Q4),private consumption (2.8 percent Q4),imports (6.0 percent Q4) and exports (3.8 percent Q4). (Statistics Denmark) Exports Lagging -------------- ¶6. The global slowdown in economic growth is causing major headaches for the Danish export sector. Exports fell by 8.5 percent in fourth quarter of 2008 compared to the third quarter, and economists fear that the lack of demand for Danish goods abroad will last for a considerable time. Analysts attribute the drop to the dramatic economic slowdown in Denmark's primary export markets such as Germany, Denmark's most important trading partner. At the same time, the Danish ability to compete has suffered because of wage increases above the European norm, and unfavorable exchange rate developments in important export markets such as UK, Sweden and Norway. SAS Launches New Strategy -------------- ¶7. Scandinavia's largest airline SAS had a bad year in ¶2008. As a result of the loss of SEK 6.26 billion (USD 754 million) in 2008, SAS launched a new strategy called "Core SAS." The strategy includes a renewed focus on the Scandinavian home market, cutting 40 percent of its routes, selling foreign units and eliminating about 9,000 employees. There are also plans to sell as much as SEK 6 billion (USD 726.4 million) in stock. The major SAS stockholders (the Danish, Swedish, and Norwegian governments) are in agreement that new capital is needed. McCulley