Tuesday, July 10, 2012

Think Interest Rates Can’t Go Any Lower – In Denmark Central Bank Now Has a Negative Rate

Stuff They Didn’t Teach Us in Econ 101 or  Even Econ 801

A core component  of economics and finance is what academics call the Time Value of Money.  This concept stands for the fact (?) that a dollar today has greater value than a dollar to be received in the future.  This is the economic basis for charging interest.  Interest is the compensation required to get someone to postpone into the future the receipt of money rather than have those funds today.

Under this theory the rate of interest cannot be zero and certainly cannot be negative.  But someone forgot to mention that to the Danes, whose central bank, nicely named the Nationalbanken now has officially adopted a negative interest rate policy.

Nationalbanken lowered its deposit rate to minus-0.2%, from 0.05%.

This means exactly what you would think it means.

Some of the world's lowest benchmark rates:
  • Japan .05%
  • Federal Reserve 0.125%
  • Denmark 0.2%
  • United Kingdom 0.5%
  • Hong Kong 0.5%
  • Czech Republic 0.5%
Source: J.P. Morgan Chase & Co.

For Denmark's banks and others seeking a haven, there is a downside to the Nationalbanken's rare decision: They now face paying for the right to park their money in the central bank. By dissuading banks from simply sinking money in ultra-safe deposits at the central bank, Nationalbanken has driven down the attractiveness of the currency and therefore softened the market.

Yep, no doubt about it.  Make the interest rate on Danish krone negative and it will sure discourage most of us from holding Danish krone.

This is not the first time in the current financial crisis that interest rates have turned negative.

Yields on Swiss government debt, for instance, first turned negative last August when it was able to pay negative 1% for six-month paper. And Danish debt has also fetched negative yields at auction, with debt being sold at yields spanning negative 0.08% to negative 0.14% in recent months.

But the move by Denmark now means that text book authors in Finance and Economics now have to shout out that line from the great movies about reporters and newspapers,



  1. Perhaps the Fed should take notice. A little negativity, please? The reaction of the "jobcreatorsenginesoftheeconomy" would be interesting. Could this be the cure for the depression?

  2. The interest rate on danish 10-year state bonds has managed to fall in recent days. 10 year state bonds was earlier today selling at 1,0% interest rate


    Do not forget when looking at the fiscal health of Denmark that the danish state is a lot more healthy than indicated by the Emu debt.

    Speaking from memory

    Emu debt was at the end of 2011 at 43% or 45% of GDP but state debt was at 23% of GDP and public net debt at 3,5% of GDP

    Corresponding numbers for Germany was Emu debt of approximately 83% of GDP and net debt of 55%

    Many people just look at Emu debt, but that is kind of meaningless since you just look at issued bonds instead of taking cash reserves and assets into account. Danish state debt is much lower than Emu debt due to the danish state having large amount of money in it's accounts in the nationalbank and public funds and net debt even lower due to the money in public companies

    That is a quite strong position considering that Denmark is implementing structural reforms at high speed, those Germans better watch out, we danes are trying to gain competiveness against them via structural reforms and it is worth noticing that Denmark do not have the same financial liabilities as Germany since Denmark is not part of the Euro.

    Makes sense that Denmark is seen as a safe haven since there is a large currency account surplus, a peg to the Euro with a narrow band there has a long history of being defended and record high foreign currency reserves.

  3. Yesterday from the chinese xinhua news office:


    Danish two-year government bond yield has also dropped to minus 0.23 percent in recent days, after its first-ever dip below zero on June. 19, indicating that investors were actually willing to pay to keep the bonds.

    Yields of the Danish long-term bond ell by one basis point to 1.04 percent at around 0900 local time (0700 GMT). That brings the yield even closer to the all-time low of 0.95 percent recored in early June, according to Danish financial website Borsen.dk.