DENMARK: MARCH ECONOMIC HIGHLIGHTS

UNCLAS SECTION 01 OF 02 COPENHAGEN 000158

SIPDIS

STATE FOR EEB/IFD/OMA AND EEB/TPP/ABT
TREASURY FOR DAVID WRIGHT
COMMERCE FOR PAUL DACHER

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ELAB KTDB PGOV DA

SUBJECT: DENMARK: MARCH ECONOMIC HIGHLIGHTS

REF: COPENHAGEN 105 (TAX REFORM MOVES FORWARD),COPENHAGEN
51 (BANK BAILOUT PLAN)


1. Contents
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ECON: Opposition Says Stimulate, Government Says Wait
EAGR: Fat Tax Sounds Death Knell for Danish Pastry?
ECON: Denmark by Numbers
EFIN: More Grim News from the Financial Sector
EFIN: Bankruptcy Hammer to Fall in September?
ENRG: Vestas Loses Market Share to GE

Opposition Says Stimulate, Government Says Wait
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2. Though many local economists and a growing number of
business executives are joining Denmark's left-of-center
opposition and labor unions in arguing that the Danish
economy urgently needs a major public spending stimulus
package to revive the economy, the Danish government appears
content to maintain a wait-and-see approach while it gauges
the impact of recently-enacted tax reform measures (Ref A).
By implementing an across-the-board personal income tax cut
that lowers tax for all Danes by 1.5 percent and an
additional 6 percent for about half the population, the
government projects that the reduction will boost GDP growth
by at least 1.5 percent and create 19,000 new jobs.


3. In addition to the personal income tax cut, the
government's tax reform package also allows citizens to
withdraw contributions made to a special mandatory pension
fund that was in effect from 1998 to 2003. Polling
indicates that more than half of all eligible Danes intend
to make such a withdrawal when the program takes effect on
June 1, and will spend the money on consumer items or pay
down debt. If so, this step alone could result in an
additional 1 percent growth in GDP. While the Danish
government's tax reform package has drawn praise from the
OECD, critics point out that the tax cuts only start in 2010
and that any stimulating effects of the special pension fund
withdrawal plan will not be realized until late 2009.

Fat Tax Sounds Death Knell for Danish Pastry?
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4. The Danish government announced it will offset the loss
of tax revenue caused by the newly-enacted personal income
tax cut by imposing a new set of "environmental" taxes and
duties on industry. Among these is a new DKK 25 (USD 4.50)
per kilo tax on saturated fats and sugar, a move that has
elicited howls of outrage from the Danish baked goods
industry and pastry gourmands. Industry insiders estimate
that the retail price of the delicacy known to most of the
world as a "Danish pastry" (curiously, Danes call it "Vienna
Bread") will increase by at least 15 percent. The chief of
the Danish Bakery and Confectionery trade association
expressed fear that the move will lead to closure of many
neighborhood bakeries and may even result in the demise of
the Danish pastry in Denmark. FAS reports that the new
"environmental" taxes and duties are unlikely to affect
American agricultural exports to Denmark.

Denmark By Numbers
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5. Denmark's inflation rate was 1.7 percent in February,
unchanged from January and the first time in six months that
inflation did not decline. Inflation in Denmark is about
0.5 percent higher than in the euro zone. The Danish
National Bank projects that the Danish economy will be in a
recession throughout 2009 with a GDP contraction of 1.1
percent, but projects a recovery in late 2011. Most
financial commentators scoff at what they characterize as
overly hopeful projections, and claim that a more realistic
forecast is GDP contraction of at least 2.5 percent in 2009.
Unemployment continues to creep steadily higher:
extrapolating from OECD's most recent January statistics, we
estimate the current unemployment rate is just over 5
percent.

More Grim News from the Financial Sector
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6. According to a recent survey conducted by a financial
sector trade association, 20 percent of all Danish banks are
at serious risk of not being able to pay employees and

COPENHAGEN 00000158 002 OF 002


creditors in the coming months. The numbers are even worse
when looking at the financial sector in general and not just
banks, with 2,000 out of 7,400 financial firms in real
danger of defaulting on payroll and operating expense
payments during the next year. Denmark's four biggest banks
are projected to lose DKK 30-48 billion (USD 5.4-8.7
billion) through non-performing loans in 2009 on top of a
collective loss of DKK 30 billion in 2008. If so, Danish
banks would burn through two-thirds of the government's DKK
75 billion bank bailout fund in less than one year, far
faster than the government had anticipated (Ref B).
Although government officials took pains to emphasize that
the bailout plan was designed to facilitate increased
lending, 38 percent of businesses say they are still
experiencing difficulty in obtaining bank financing.

Bankruptcy Hammer to Fall in September?
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7. As part of the Danish government's recently-enacted tax
reform package, Danish companies were granted an immediate
six-month grace period in paying VAT and other taxes.
According to the Danish Chamber of Commerce, this six-month
tax holiday is the only thing that is keeping some companies
afloat right now. The Chamber issued a dire warning that
the number of bankruptcies may explode in September when the
tax holiday ends. 2009 has already been a banner year for
bankruptcies and is on pace to far surpass the total number
of bankruptcies in 2008, the worst year on record. There
were 513 bankruptcies in February, 10 percent up from
January, and 120 percent more than February 2008.

Vestas Loses Wind Turbine Market Share to GE
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8. Danish alternative energy dynamo Vestas Wind Systems
ended 2008 with 19.8 percent of the global market share for
wind energy, considerably lower than its stated goal of a 25
percent market share and its 22.8 percent share in 2007. GE
Energy is gaining market share fast and is a close second on
the global scene with a market share of 18.6 percent, up
from 16.6 in 2007. GE Energy is projected to overtake
Vestas as the world's biggest wind turbine producer in the
near future if current trends continue.

McCulley