VZCZCXRO3282
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHCP #0024/01 0091401
ZNR UUUUU ZZH
R 091401Z JAN 09
FM AMEMBASSY COPENHAGEN
TO RUEHC/SECSTATE WASHDC 4710
INFO RUCNMEM/EU MEMBER STATES
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 COPENHAGEN 000024 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EEB/IFD/OMA AND EEB/EPPD. 
TREASURY FOR VIMAL ATUKORALA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN DA
SUBJECT: DANISH ECONOMY TREADING WATER IN A CHOPPY SEA 
 
REF: A. 08 COPENHAGEN 540 (BANK SAFETY NET PLAN) 
     ¶B. 08 COPENHAGEN 574 (DOWNBEAT ON ECONOMY) 
     ¶C. 08 STATE 134459 (REPORTING ON FINANCIAL CRISIS) 
 
¶1. (SBU) Summary.  One of the first EU nations to slide into 
recession in 2008, Denmark absorbed many of the same economic 
body blows felt by other OECD nations and is braced for what 
is expected by all forecasts to be a bleak  2009.  Due to 
relatively prudent pre-crisis lending practices and a timely 
October 2008 public/private "bank safety net" program that 
guaranteed all bank deposits, the Danish financial sector is 
generally sound but cautious (business groups say excessively 
cautious) about new lending.  In order to spur new lending, 
the Danish government is considering the injection of public 
finds into private banks.  The initiative has been dogged by 
lack of consensus over whether private banks need -- or even 
want -- public money, and whether the banks will lend the 
money in a manner envisioned by the government.  Denmark's 
leading stock index gave back nearly half of its value in 
2008, real estate values have plunged, and economists predict 
that Denmark's budget surplus will likely vanish in 2009. 
The Danish government's machinations to protect its 
semi-battered, euro-pegged krone and a disparity in interest 
rates between Denmark and the EU have helped re-fuel public 
debate about euro adoption.  Denmark's jobless rate is still 
among Europe's lowest, but analysts forecast that continued 
economic contraction throughout 2009 may double the current 
unemployment rate of 1.9 percent by year's end.  End Summary. 
 
Banking Sector: Sound Banks Skittish about New Loans 
--------------------------------------------- -------- 
 
¶2. (SBU) After absorbing losses in 2008 that caused one major 
bank to crash into insolvency and several other troubled 
banks to merge, the Danish banking sector is reportedly in 
relatively sound overall financial health, though the value 
of publicly-traded bank shares has plummeted precipitously in 
the last five months.  Observers attribute the sector's 
relative stability to two major factors.  One, pre-crisis 
bank lending practices were generally prudent in comparison 
to those exercised by many U.S. banks, particularly in real 
estate and construction financing; and two, a bank "safety 
net" plan financed jointly by banks and the Danish government 
to provide unlimited guarantees on bank deposits, a bold and 
decisive measure taken early in last autumn's global 
financial meltdown that went far to allay public panic and 
avert a possible run on banks (Ref A). 
 
¶3. (SBU) As in the U.S. and elsewhere, however, Danish 
borrowers are experiencing a tight credit market as banks 
have grown more cautious in lending over the past several 
months.  A variety of interlocutors attribute the current 
credit crunch more to psychological rather than purely 
economic factors.  Jan Olsen, a senior executive of Danske 
Bank, Denmark's leading financial institution, told us that 
"nobody trusts anyone else right now, banks don't trust other 
banks and they don't trust their customers like they once 
did."  Olsen acknowledged the frustration of the Danish 
private business sector over the tightness of credit 
(according to the Confederation of Danish Industries, over 
one-third of all Danish businesses are reporting difficulty 
in obtaining new financing), but claimed that such complaints 
are exaggerated and ill-founded.  Olsen insisted that his 
bank and other lenders are still making new loans at 
relatively low interest rates -- for example, the current 
interest rate for a 30-year mortgage is below 5 percent -- 
but lenders are far more meticulous and exacting in review of 
loan proposals than they were in the recent past.  As Olsen 
stated, "we are now doing business like we did ten years ago, 
not two years ago, and the process takes a lot of time and 
documentation."  The Danske Bank executive admitted that 
loans to the information technology sector have ceased, not 
due to perceived greater-than-normal sector volatility but 
rather because of a recent scandal surrounding Stein Bagger 
(a flamboyant rogue software entrepreneur with a taste for 
body-builder mistresses and Hell's Angel bodyguards), who 
allegedly bilked Danske Bank and other investors out of as 
much as USD 250 million. 
 
¶4. (SBU) In order to grease the lending skids, the Danish 
government is engaged in discussions with parliament and 
banking sector representatives over a proposal to inject 
public funds into the private banking sector.  In a January 7 
roundtable meeting hosted by the Ambassador for Prime 
Minister Anders Fogh Rasmussen and the board of the local 
American Chamber of Commerce, Rasmussen emphasized that the 
plan was designed strictly to spur bank lending, not to prop 
up banks.  Progress on the liquidity injection initiative has 
 
COPENHAGEN 00000024  002 OF 002 
 
 
been slow due to a lack of consensus on whether the banks 
actually need (or even want) public funds, and whether an 
injection of public money will indeed lead to increased 
lending by private bankers.  Observers report that parties to 
the discussion are examining closely the impact of steps 
taken pursuant to the U.S. Emergency Economic Act of 2008 in 
an attempt to glean lessons learned.  Danske Bank executive 
Jan Olsen told us his bank and other major banks are already 
able to obtain all the money they need on the open market, do 
not particularly want an injection of public funds, and will 
likely maintain current lending practices even if public 
money is provided to them.  In possible anticipation of 
continued bank stodginess, Prime Minister Rasmussen told the 
AmCham board that his government will pursue a more direct 
economic stimulus package if the bank liquidity injection 
plan does not achieve a desired result.  Repeating a theme 
that came up in his New Years Day speech to the nation, 
Rasmussen also said his government would seek to enact major 
cuts in personal income tax rates by the end of the year in 
order to promote work and productivity, but he conceded that 
the tax reduction proposal will face stiff opposition in 
parliament. 
 
Dwindling Budget Surplus, Rising Joblessness 
-------------------------------------------- 
 
¶5. (SBU) In 2008, Denmark was one of the first EU countries 
to fall into a technical recession, and three consecutive 
quarters of GDP contraction have taken a toll on the Danish 
current account.  Denmark's once-enviable budget surplus 
(about 5 percent of GDP from 2005 to 2007) has dwindled, and 
economists are predicting that Denmark will likely soon see 
its first budget deficit since the mid-1990s due in some 
measure to drops in global oil prices and maritime shipping 
rates, two of Denmark's major income sources.  In the second 
half of 2008, the Danish krone depreciated as much as 24 
percent against the U.S. dollar before a late-year rebound of 
about 6 percent.  Even though the Danish krone is tied to the 
euro, the Danish Central Bank has been obliged to protect the 
krone against speculation through a series of interest rate 
hikes and cuts independent of those by the European Central 
Bank.  The central bank interest rate now stands at 3.75 
percent after a reduction in late 2008, and is reportedly 
among the highest rates in Western Europe.  The efficacy of 
the krone/euro peg and the disparity in central bank interest 
rates between Denmark and te euro zone have combined to 
re-ignite debate witin Denmark about the advantages of euro 
adoption  Speaking for what is reported to be a growing 
umber of euro adoption advocates, leading Danish economist 
Steen Bocian stted that Denmark "currently enjoys neither 
the avantages of being part of the euro nor the advantaes 
of having an independent currency."  Althoughthe Danish 
electorate has twice rejected euro adotion, most recently in 
a 2000 referendum, the Ramussen government is reportedly 
exploring the posibility of holding yet another euro 
referendum ater this year. 
 
¶6. (SBU) For most of this decad, Danes have been able to 
boast of historically-low unemployment rates, and Danish 
businesses complained loudly of a lack of available labor. 
While Denmark continues to suffer from a shortage of 
highly-skilled workers in certain sectors (a point emphasized 
by AmCham members in their January 7 roundtable meeting with 
the Prime Minister at the Ambassador's residence), the salad 
days of "structural full employment" in Denmark appear to be 
over.  According to Danish government statistics, Denmark 
experienced 3,856 personal and business bankruptcies in 2008, 
the highest total since 1996, and economists have 
extrapolated that bankruptcies resulted in a loss of 19,000 
jobs last year.  While Denmark continues to have one of 
Europe's lowest jobless rates at about 3.4 percent (EU 
defined rate -- as defined under the Danish government's 
statistical methodology, the rate is 1.9 percent), this 
figure is expected to rise significantly in the coming year. 
Denmark's National Economic Council has forecast continued 
negative growth throughout 2009 and total unemployment of 
around 100,000 by the end of the year, almost double the 
current figure of 52,000 jobless Dames.  Denmark's C20 index 
of leading blue-chip companies followed the global trend of 
stock market setbacks in 2008 by losing nearly 50 percent of 
its value.  Real estate values have fallen throughout 
Denmark, and the current property market is full of sellers 
and few buyers. 
CAIN