Denmark’s got luxury issues -- relatively lots of money and little debt -- and it’s creating troubles for the government bond market.
Denmark’s got luxury issues — relatively lots of money and little debt — and it’s creating troubles for the government bond market.
The government’s account at the central bank climbed last month to 207 billion kroner ($34 billion), or twice the target and the highest in three years. Nice to have but it’s also costing millions in interest payments, given the bank’s negative rates. Meanwhile, the ratio of debt to gross domestic product is half that of the European average, putting pressure on bond market liquidity.
That’s forcing officials to think of ways to draw down the central bank account while at the same time driving up liquidity, at least in key series.
A year ago, the debt office began paying primary dealers if they meet criteria designed to increase turnover. That helped tighten bid-to-ask spreads. This year, the government’s engaging in refinancing gymnastics.
Last week the state took the unexpected step of saying it would buy 3.6 billion kroner in securities issued by KommuneKredit, which is owned by local governments. That wasn’t included in the government’s debt plan for the year and helps increase the funding needs, according to Jan Ostergaard, chief analyst at Danske Bank A/S.
There’s also the 180 billion kroner in covered bonds outstanding that have been issued by mortgage banks to fund public housing. The national housing authority plans to replace much of that with new state-guaranteed bonds which the debt office will, in turn, purchase by issuing government bonds. Denmark’s given itself 10 years to complete the switch.
It’ll probably take a fraction of that time, given the “headache” created by the account at the central bank and low debt needs, Ostergaard said. He’s expecting the debt office to “accept a higher amount of cash at their account” when it updates the strategy in June.
“Something has to give,” Ostergaard said.
And the switch will save the government 9 billion kroner by 2025.