Identifier
Created
Classification
Origin
09COPENHAGEN24
2009-01-09 14:01:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Copenhagen
Cable title:  

DANISH ECONOMY TREADING WATER IN A CHOPPY SEA

Tags:  ECON EFIN DA 
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VZCZCXRO3282
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHCP #0024/01 0091401
ZNR UUUUU ZZH
R 091401Z JAN 09
FM AMEMBASSY COPENHAGEN
TO RUEHC/SECSTATE WASHDC 4710
INFO RUCNMEM/EU MEMBER STATES
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 COPENHAGEN 000024 

SENSITIVE
SIPDIS

DEPT FOR EEB/IFD/OMA AND EEB/EPPD.
TREASURY FOR VIMAL ATUKORALA

E.O. 12958: N/A
TAGS: ECON EFIN DA
SUBJECT: DANISH ECONOMY TREADING WATER IN A CHOPPY SEA

REF: A. 08 COPENHAGEN 540 (BANK SAFETY NET PLAN)

B. 08 COPENHAGEN 574 (DOWNBEAT ON ECONOMY)

C. 08 STATE 134459 (REPORTING ON FINANCIAL CRISIS)

UNCLAS SECTION 01 OF 02 COPENHAGEN 000024

SENSITIVE
SIPDIS

DEPT FOR EEB/IFD/OMA AND EEB/EPPD.
TREASURY FOR VIMAL ATUKORALA

E.O. 12958: N/A
TAGS: ECON EFIN DA
SUBJECT: DANISH ECONOMY TREADING WATER IN A CHOPPY SEA

REF: A. 08 COPENHAGEN 540 (BANK SAFETY NET PLAN)

B. 08 COPENHAGEN 574 (DOWNBEAT ON ECONOMY)

C. 08 STATE 134459 (REPORTING ON FINANCIAL CRISIS)


1. (SBU) Summary. One of the first EU nations to slide into
recession in 2008, Denmark absorbed many of the same economic
body blows felt by other OECD nations and is braced for what
is expected by all forecasts to be a bleak 2009. Due to
relatively prudent pre-crisis lending practices and a timely
October 2008 public/private "bank safety net" program that
guaranteed all bank deposits, the Danish financial sector is
generally sound but cautious (business groups say excessively
cautious) about new lending. In order to spur new lending,
the Danish government is considering the injection of public
finds into private banks. The initiative has been dogged by
lack of consensus over whether private banks need -- or even
want -- public money, and whether the banks will lend the
money in a manner envisioned by the government. Denmark's
leading stock index gave back nearly half of its value in
2008, real estate values have plunged, and economists predict
that Denmark's budget surplus will likely vanish in 2009.
The Danish government's machinations to protect its
semi-battered, euro-pegged krone and a disparity in interest
rates between Denmark and the EU have helped re-fuel public
debate about euro adoption. Denmark's jobless rate is still
among Europe's lowest, but analysts forecast that continued
economic contraction throughout 2009 may double the current
unemployment rate of 1.9 percent by year's end. End Summary.

Banking Sector: Sound Banks Skittish about New Loans
-------------- --------------


2. (SBU) After absorbing losses in 2008 that caused one major
bank to crash into insolvency and several other troubled
banks to merge, the Danish banking sector is reportedly in
relatively sound overall financial health, though the value
of publicly-traded bank shares has plummeted precipitously in
the last five months. Observers attribute the sector's
relative stability to two major factors. One, pre-crisis
bank lending practices were generally prudent in comparison
to those exercised by many U.S. banks, particularly in real
estate and construction financing; and two, a bank "safety
net" plan financed jointly by banks and the Danish government

to provide unlimited guarantees on bank deposits, a bold and
decisive measure taken early in last autumn's global
financial meltdown that went far to allay public panic and
avert a possible run on banks (Ref A).


3. (SBU) As in the U.S. and elsewhere, however, Danish
borrowers are experiencing a tight credit market as banks
have grown more cautious in lending over the past several
months. A variety of interlocutors attribute the current
credit crunch more to psychological rather than purely
economic factors. Jan Olsen, a senior executive of Danske
Bank, Denmark's leading financial institution, told us that
"nobody trusts anyone else right now, banks don't trust other
banks and they don't trust their customers like they once
did." Olsen acknowledged the frustration of the Danish
private business sector over the tightness of credit
(according to the Confederation of Danish Industries, over
one-third of all Danish businesses are reporting difficulty
in obtaining new financing),but claimed that such complaints
are exaggerated and ill-founded. Olsen insisted that his
bank and other lenders are still making new loans at
relatively low interest rates -- for example, the current
interest rate for a 30-year mortgage is below 5 percent --
but lenders are far more meticulous and exacting in review of
loan proposals than they were in the recent past. As Olsen
stated, "we are now doing business like we did ten years ago,
not two years ago, and the process takes a lot of time and
documentation." The Danske Bank executive admitted that
loans to the information technology sector have ceased, not
due to perceived greater-than-normal sector volatility but
rather because of a recent scandal surrounding Stein Bagger
(a flamboyant rogue software entrepreneur with a taste for
body-builder mistresses and Hell's Angel bodyguards),who
allegedly bilked Danske Bank and other investors out of as
much as USD 250 million.


4. (SBU) In order to grease the lending skids, the Danish
government is engaged in discussions with parliament and
banking sector representatives over a proposal to inject
public funds into the private banking sector. In a January 7
roundtable meeting hosted by the Ambassador for Prime
Minister Anders Fogh Rasmussen and the board of the local
American Chamber of Commerce, Rasmussen emphasized that the
plan was designed strictly to spur bank lending, not to prop
up banks. Progress on the liquidity injection initiative has

COPENHAGEN 00000024 002 OF 002


been slow due to a lack of consensus on whether the banks
actually need (or even want) public funds, and whether an
injection of public money will indeed lead to increased
lending by private bankers. Observers report that parties to
the discussion are examining closely the impact of steps
taken pursuant to the U.S. Emergency Economic Act of 2008 in
an attempt to glean lessons learned. Danske Bank executive
Jan Olsen told us his bank and other major banks are already
able to obtain all the money they need on the open market, do
not particularly want an injection of public funds, and will
likely maintain current lending practices even if public
money is provided to them. In possible anticipation of
continued bank stodginess, Prime Minister Rasmussen told the
AmCham board that his government will pursue a more direct
economic stimulus package if the bank liquidity injection
plan does not achieve a desired result. Repeating a theme
that came up in his New Years Day speech to the nation,
Rasmussen also said his government would seek to enact major
cuts in personal income tax rates by the end of the year in
order to promote work and productivity, but he conceded that
the tax reduction proposal will face stiff opposition in
parliament.

Dwindling Budget Surplus, Rising Joblessness
--------------


5. (SBU) In 2008, Denmark was one of the first EU countries
to fall into a technical recession, and three consecutive
quarters of GDP contraction have taken a toll on the Danish
current account. Denmark's once-enviable budget surplus
(about 5 percent of GDP from 2005 to 2007) has dwindled, and
economists are predicting that Denmark will likely soon see
its first budget deficit since the mid-1990s due in some
measure to drops in global oil prices and maritime shipping
rates, two of Denmark's major income sources. In the second
half of 2008, the Danish krone depreciated as much as 24
percent against the U.S. dollar before a late-year rebound of
about 6 percent. Even though the Danish krone is tied to the
euro, the Danish Central Bank has been obliged to protect the
krone against speculation through a series of interest rate
hikes and cuts independent of those by the European Central
Bank. The central bank interest rate now stands at 3.75
percent after a reduction in late 2008, and is reportedly
among the highest rates in Western Europe. The efficacy of
the krone/euro peg and the disparity in central bank interest
rates between Denmark and te euro zone have combined to
re-ignite debate witin Denmark about the advantages of euro
adoption Speaking for what is reported to be a growing
umber of euro adoption advocates, leading Danish economist
Steen Bocian stted that Denmark "currently enjoys neither
the avantages of being part of the euro nor the advantaes
of having an independent currency." Althoughthe Danish
electorate has twice rejected euro adotion, most recently in
a 2000 referendum, the Ramussen government is reportedly
exploring the posibility of holding yet another euro
referendum ater this year.


6. (SBU) For most of this decad, Danes have been able to
boast of historically-low unemployment rates, and Danish
businesses complained loudly of a lack of available labor.
While Denmark continues to suffer from a shortage of
highly-skilled workers in certain sectors (a point emphasized
by AmCham members in their January 7 roundtable meeting with
the Prime Minister at the Ambassador's residence),the salad
days of "structural full employment" in Denmark appear to be
over. According to Danish government statistics, Denmark
experienced 3,856 personal and business bankruptcies in 2008,
the highest total since 1996, and economists have
extrapolated that bankruptcies resulted in a loss of 19,000
jobs last year. While Denmark continues to have one of
Europe's lowest jobless rates at about 3.4 percent (EU
defined rate -- as defined under the Danish government's
statistical methodology, the rate is 1.9 percent),this
figure is expected to rise significantly in the coming year.
Denmark's National Economic Council has forecast continued
negative growth throughout 2009 and total unemployment of
around 100,000 by the end of the year, almost double the
current figure of 52,000 jobless Dames. Denmark's C20 index
of leading blue-chip companies followed the global trend of
stock market setbacks in 2008 by losing nearly 50 percent of
its value. Real estate values have fallen throughout
Denmark, and the current property market is full of sellers
and few buyers.
CAIN