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Concern in Denmark as Its Currency’s Peg to the Euro Is Strained

Danish krone notes being printed in Copenhagen. There is grave concern in Denmark that the currency's exchange-rate peg to the euro will be broken. Credit...Reuters

COPENHAGEN — To better understand the wave of negative interest rates among European central banks, consider the krone.

The krone — or crown, as it is known in English — is more than simply Denmark’s currency. For more than three decades, the government’s efforts to control the crown’s value have effectively defined the Danish economy.

That is because in October 1982, Denmark decided on what then seemed a radical plan to secure its economic future: It would tie its fate to West Germany, its biggest trading partner, by adopting a fixed exchange rate for the crown against the German mark. It was a gamble that a small nation with a strong neighbor was better off surrendering control of crucial parts of its economy in return for a stable currency.

Over the years, that tie, or “peg,” morphed into a fixed-rate arrangement with the successor to the mark, the euro currency now used by Germany and 18 other European Union countries — though notably, not Denmark.

The bet on the peg has paid off. Today, living standards in this Scandinavian nation of 5.6 million are among the highest in the world. And Denmark is one of just nine countries whose government debt is given the top grade, an AAA credit risk, by all of the major ratings agencies.

But in recent weeks the country’s fixed exchange-rate regime has come under extreme strain, as moves by the European Central Bank have caused the value of the euro to plummet.

That has led to grave concern here, as speculators bet that Denmark’s currency peg to the euro will break, giving them outsize profits on the Danish assets they hold as the crown rises in value. For the Danes, however, breaking the crown-euro peg could be an economic catastrophe. Thousands of people might be thrown out of work if businesses became less internationally competitive and wealth evaporated as euro-denominated pension assets plunged in value.

The crown-euro rate “is the cornerstone for all economic policy in Denmark, with broad support from all corners of politics,” Lars Rohde, the Danish central bank governor, said in an interview. “We will do whatever it takes to defend the peg, that is our mandate, the sole mandate.”

In Mr. Rohde’s case, whatever it takes has included adopting negative interest rates — a move that its neighbor, Sweden also felt forced to take on Thursday.

The crown crisis has led the central bank to cut interest rates four times since Jan. 19, bringing the main rate down to minus 0.75 percent. That means it costs commercial lenders to keep money in the bank rather than lending it. And at least one Danish retail bank has said it will begin charging customers to hold their money.

The Danish central bank has also spent an estimated $24 billion buying euros since Jan. 15 as another means of holding down the crown’s value and maintaining the peg — purchases that have swelled Denmark’s foreign currency reserves to about 30 percent of gross domestic product. And to provide fewer attractive investment options for speculators betting on a rising crown, the Finance Ministry announced on Feb. 2 that it would suspend issuing any new bonds.

So far, as is often the case with the abstractions of monetary policy, the pressures on the euro-crown peg are not evident in everyday life. The crown continues to trade almost exactly at the official target of 7.46. In theory, the European Union’s currency treaty allows the crown to trade as much as 2.25 percent above or below that level, but in practice the central bank has never let it fluctuate that much.

Certainly there was little to suggest any alarm this week outside the upscale Magasin du Nord, a bustling department store in central Copenhagen, where fashionable shoppers were contentedly going about their business.

“It’s not really something people are talking about right now. There’s no sense of panic,” said Amalie Elmstroem, 22, a business student. “Maybe we should.”

But business executives, more attuned to the effects that currency exchange rates have on international trade, are keenly aware of what is at stake.

Jesper Brandgaard, chief financial officer of the drug maker Novo Nordisk, one of Denmark’s country’s top multinational companies, said it was “fundamental to Danish economic policy that we maintain unchanged exchange rates with our main European trading partners.”

Mr. Brandgaard noted that Denmark has a very open economy, with exports making up more than 50 percent of gross domestic product. “Changing the terms of our trading relationship with Germany would be very detrimental,” he said, pricing Danish businesses out of major markets.

For example, Novo Nordisk is among the world’s top makers of insulin products, he noted. While it incurs about 40 percent of its costs locally, in crowns, it makes only about one-half of one percent of its sales in the local currency. In the event that the crown rose dramatically, people with diabetes would be unlikely to see their insulin prices rise, he said, but Novo Nordisk’s Danish labor force would probably suffer, as “one would expect that we’d gradually increase our activities in the dollar area versus the eurozone.”

The trigger for Denmark’s central bank to start its aggressive defense of the currency peg was a surprise move by Switzerland on Jan. 15. The Swiss central bank announced that it was abandoning its target for keeping the Swiss franc from strengthening against the euro. Maintaining that target has been Swiss policy for three years, and the central bank had only days earlier reiterated its continued commitment to that approach. In response to the sudden policy switch, the Swiss franc rose 20 percent against the euro, reminding investors of the sometimes ephemeral nature of central bank promises.

But even before that, the Danish crown’s peg to the euro had been under pressure. Starting in the autumn, the euro declined in value as it become increasingly clear that the European Central Bank — the eurozone’s central bank — was moving toward large-scale bond buying, a policy known as quantitative easing. As it begins buying sovereign bonds, as early as next month, the European Central Bank will be pouring up to 60 billion euros, or $68 billion, onto the market each month.

The expected flood of euros into the market is effectively cheapening their value against other currencies — including the Danish crown.

It is a paradox universally acknowledged in Danish policy circles that the crown’s tight peg to the euro currency makes Denmark a de facto eurozone member, directly affected by European Central Bank decisions, but enjoying no right of representation.

For some Danes, particularly among the business and political elite, the answer would simply be to join the euro outright. But the voting public is not convinced. Twice, in referendums held in 1992 and 2000, the Danes have rejected giving up their national currency, partly over concerns about national sovereignty.

Mr. Rohde, the central banker, insists that he has all the tools he needs to defend the crown-euro peg, which is protected through a treaty with the European Union. The worry is that, if the upward pressure on the crown were to become too intense, the arrangement could fail, as when Britain and Sweden in 1992 were forced out of the European Rate Mechanism — a precursor agreement to the treaty that established the euro — in a speculative orgy that minted millions for hedge fund managers like George Soros.

Currency analysts, looking at the Swiss experience last month, say that if the peg breaks the crown might initially rise 10 to 20 percent against the euro. That is a situation the central bank is determined to avoid.

Mr. Rohde indicated that the central bank would use its ability to print money — create additional currency — to the extent required to buy euros and maintain the peg. “We have unlimited access to krone,” he said. “Therefore, we can go on forever.”

Steen Jakobsen, chief economist and chief information officer at Saxo Bank in Copenhagen, said that the central bank could outlast the market, but that its willingness to buy euros and cut interest rates would be based on its assessment of the cost of doing so.

“They will, until they don’t,” Jakobsen said. “That’s part of the game. They light the fuse, but only they know how long it is.”

A version of this article appears in print on   of the National edition with the headline: Concern in Denmark as Crown's Peg to Euro Is Strained. Order Reprints | Today’s Paper | Subscribe

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