Following reports on Friday that Denmark may consider restricting the flow of its sovereign currency, the Krone, between Denmark and overseas markets, the Danish central bank has today ruled that it will not go down this route.
As the Eurozone’s economy creaks under increasing debt and the likelihood that Greece may make an exit, leaving its 190 billion euro debt behind, Denmark has taken a number of measures to ensure that its own currency remains pegged to the Euro, in an opposite stance compared to that of Switzerland that removed its peg with the euro resulting in the soaring value of the franc, causing market volatility which saw off a number of retail FX firms.
Today, Denmark’s central bank made its position clear regarding the possible implementation of capital controls as policy makers and economists try to explain the mechanisms through which the nation’s currency regime operates.
“The government has no plans to impose restrictions on capital movements,” Economy Ministry spokeswoman Sigga Nolsoee said in a phone interview today with Bloomberg.
Capital control laws are most often associated with nations whose governments either are not aligned with the ideology of free market economies, or nations whose officials do not welcome the free movement of sovereign currency or citizens, such as China, Cuba, Venezuela and Argentina.
The mere suggestion that Denmark could implement such a measure, albeit for a limited time period, especially after taking measures to intentionally depreciate the Krone to stop Denmark becoming a safe haven for investors at a time when the Euro’s future hangs in the balance, resulted in the nation’s biggest banks having tried to reassure clients that such speculation is groundless.
Danske Bank A/S notes that Denmark’s position inside the European Union’s single market means it must allow the free movement of capital. Additionally, imposing capital controls makes little sense when a central bank is going headlong toward a capital influx.
The notion that Denmark could use capital controls “should be regarded as unthinkable and thus not be a worry to the market,” Danske Bank senior analyst Jens Naervig Pedersen said in a note to clients today.
This u-turn in policy is reflected in the opinion of Hans Joergen Whitta-Jacobsen, the head of Denmark’s Economic Council, who indicated on Friday that capital control laws may be implemented. Mr. Whitta-Jacobsen, who doesn’t advise the central bank, has since said he does not think such a measure is necessary or likely.
In an interview, Mr. Whitta-Jacobsen stated “I never advised the central bank to impose capital controls and I don’t expect they will be used. I’m not an adviser to the central bank or the government, I’m an independent expert.”
Nordea Bank AB, Scandinavia’s biggest lender, is advising clients to take Mr. Whitta-Jacobsen’s comments, which helped drive the krone lower on Friday, with a “grain of salt.” Both Nordea and Danske say they expect demand for kroner to return.
The confusion is the latest test of Denmark’s ability to manage its euro peg. Since Switzerland’s Jan. 15 decision to sever the franc’s ties to the euro, the Danish central bank has fought back conjecture it would be next. Its efforts to counter demand for AAA-rated Danish assets have included record krone sales and rate cuts, bringing the benchmark deposit rate to minus 0.75 percent.
“We remain concerned primarily with EUR/DKK downside pressure,” stated Mr, Pedersen. “Fundamentally, Denmark has an unsustainably high current account surplus, above 6 percent of gross domestic product, which supports a strong krone.”
According to a report by Bloomberg, the central bank’s job is to target 7.46038 kroner per euro inside a 2.25 percent tolerance band. In practice, it doesn’t allow swings greater than 0.5 percent. The krone strengthened 0.06 percent to 7.4583 per euro as of 9:14 a.m. in Copenhagen, its biggest gain since Feb. 4, according to closing prices.
It is highly likely that the Danish central bank will continue with currency- market interventions to prevent the Krone from strengthening but is unlikely to cut the deposit rate again in the coming 12 months, according to Danske Bank.