There’s an interesting wee story doing the rounds that moment regarding Denmark and their foreign debt.
I’ve seen a few folk get a bit over excited about the story and have misinterpreted it as saying that Denmark is now debt free. First up, it’s not. Their national debt is at about 38% of GDP (compared to the UK’s 85.4%). This isn’t about the Danes paying off all of their national debt, it’s just saying that they no longer have any debt which is denominated in foreign currencies. All of the Danish national debt is, for the moment, denominated in Danish krone.
There’s a more interesting story under here about why it has happened though. It’s the story of managing one’s currency and maintaining a currency peg with regard to another. This is something that folk in Scotland should be watching closely as our own debate about currencies heats up again.
Not long ago I wrote an article on defending one’s currency against speculative attacks but many of the lessons also apply to more gradual changes in currency value and the effects are being borne out in Denmark as we speak.
Recently the instability in the Eurozone and reduction in confidence in the euro has seen investors selling euros and buying krone, seeing it as a safer investment. This is pushing up the value of krone which, if it was freely floating, would affect the exchange rate between it and the euro. But Denmark seeks to maintain a stable exchange rate between the krone and the euro (At a rate of 7.46038 DKK/EUR ± 2.25%) so its central bank must intervene to prevent the rise in value. It does this by cutting interest rates (to make further purchases less attractive) and selling DKK and buying foreign currencies. This influx of foreign currency has allowed it to pay off foreign denominated debt but has also caused its foreign reserve holdings to boom from 200,000 million krone in 2008 to over 400,000 million krone today.
If the opposite case had been true, if the DKK was weakening with respect to the EUR, we might expect the levers to be pulled in the opposite direction. Interests rates would increase to attract investment and foreign reserves would be drawn down as foreign currencies were sold to buy up krone holdings and support the value of the currencies and we might see the central bank issue bonds marked in foreign currencies rather than paying them off.
It may well be that Denmark can continue do defend its currency peg for some time, although some have eyed the possibility of a break similar to the one Switzerland went through in January 2015. A couple of years on from the Swiss break the risk of Denmark following suit appears to have receded for the moment.
All in Denmark – currently the 2nd happiest county on Earth – is showing what happens when a small country of 5-and-a-bit million people, its own currency and the will to manage it can do and whether or not Scotland specifically chooses a path similar to this (by pegging a £Scot to the GBP or, indeed, the EUR), Denmark should be taken as an example of what can be done. A small island of light and clarity in a world where the people of Scotland are about to be told repeatedly and in detail what some folk think we can’t do.