COPENHAGEN (Reuters) – Denmark’s fixed exchange rate will remain the cornerstone of its economic policy, despite the burden of negative interest rates the country is carrying to keep the crown’s peg against the euro in place, its finance minister said.
Should speculators try to dislodge it or Greece exit the single currency zone, there is no back-up plan, Bjarne Corydon told Reuters on Wednesday.
Asked whether Denmark had a ‘Plan B’ in case of a speculative attack, he said: “No. We have quite a sufficient ‘Plan A’.”
The central bank has tried to stem a rising tide of demand for Danish assets as investors worried about the impact of Greece’s debt crisis on the euro zone seek safer markets.
Denmark has cut interest rates four times since mid-January after Switzerland caused havoc on currency markets by ditching its franc cap against the euro, and both countries’ deposit rates now stand at -0.75 per cent.
The Swiss move led some to think Denmark might do the same, but the long tradition behind the fixed Danish currency – which began life as a peg to the German mark – and the political and financial consensus underpinning it, means that is unlikely.
“The difference between Switzerland and Denmark is quite obvious,” Corydon said.
“(Denmark’s peg) survived the end of the cold war, it survived (a move) to the euro zone, it survived political turmoil, it survived the great depression.”
But with a deposit rate below zero, Danish banks are having to pay millions to deposit cash needed for liquidity at the central bank while two large lenders have ceased offering mortgages with short-term adjustable rates.