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
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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