Monetary Review
Monetary Review
1st Quarter
04
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Danmarks Nationalbank
Telephone +45 33 63 63 63
www.nationalbanken.dk
MON1_04.indd 1
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E-mail: info@nationalbanken.dk
2004
Danmarks Nationalbank
Danmarks
Nationalbank
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03-02-2004, 10:28:58
The small picture on the front cover is a section of the national coat of arms as redesigned
in 2003 as the motif on the reverse of the 20-krone.
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The Monetary Review is published by Danmarks Nationalbank and is issued quarterly.
Managing Editor: Jens Thomsen
Editor: Anders Møller Christensen
The Monetary Review can be ordered from:
Danmarks Nationalbank, Information Desk, Havnegade 5, DK-1093 Copenhagen K.
Telephone +45 33 63 70 00 (direct) or +45 33 63 63 63.
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SCHULTZ GRAFISK A/S
ISSN 0011-6149
(Online) ISSN 1398-3865
17-02-2004 11:23
Antal sider: 1 Rev. nr.
kolofon Oprettet af Alice Colombo
Contents
Recent Economic and Monetary Trends .............................................
1
The Development in Cash Prices of Owner-Occupied Housing..........
19
Erik Haller Pedersen, Economics
Adjusted for general price trends, owning a home is not more expensive today
than it was previously, but there are large regional differences. In the
metropolitan area, the costs of living in owner-occupied housing are at a
historically high level. It is believed that the introduction of adjustable-rate loans
has had a small positive effect on cash prices, as will the introduction of
deferred-amortisation loans.
Developments in the Danish Bond Market since 1970 .......................
35
Ulrik Knudsen and Michael Sand, Market Operations
This article outlines the development in the Danish bond market since 1970,
focusing on mortgage-credit and government bonds. Previously callable annuity
bonds dominated the market, but now there is a more equal distribution of
these bonds and uncallable bullet loans. The development in the total krone
duration has been reduced since mid-1999.
The US Current-Account Deficit and the Dollar ..................................
47
Niels C. Beier, Economics
This article provides a general overview of the developments in the US current
account and the dollar in recent years. The development is outlined in the light
of the macroeconomic development as well as the underlying capital flows.
Finally, an account is given of the future sustainability of the deficit.
Quarterly Financial Accounts for Denmark .........................................
63
Jan Overgaard Olesen and Jens Jakob Svanholt, Statistics
In April, Danmarks Nationalbank will start publishing regular quarterly financial
accounts for Denmark. This article presents the new statistics, which provide an
overview of the financial assets and liabilities of the main sectors in the
economy. In addition, some possible applications of the statistics are outlined.
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The EU's Financial Services Action Plan .................................................
83
Dorte Kurek, Financial Markets
The European Commission's Financial Services Action Plan is aimed at removing
the remaining legislative and regulatory barriers to a single financial market in
the EU. This article describes the Action Plan, the Lamfalussy procedure and the
future work towards financial integration.
Press Releases ........................................................................................
93
Tables and Graphs Section
Vol. XLIII, No. 1
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Recent Economic and Monetary Trends
This review covers the period from the middle of November 2003 to the
middle of February 2004
INTERNATIONAL FINANCIAL MARKETS
There is uncertainty as to how robust the emerging international upswing is, and particularly as to whether Europe will stumble in the initial
phase. The economic cycle is driven by the USA, but also Japan is making
progress after a prolonged period of stagnation. The euro area economy
is weaker, and forward-looking indicators are ambiguous.
In spite of improvements in the US economy, the dollar continued to
weaken vis-à-vis the euro into 2004. From the beginning of 2002 to midJanuary 2004 the dollar weakened by more than 30 per cent against the
euro to a rate of 1.28 dollars per euro, which was also the exchange rate
in mid-February. When the euro was introduced on 1 January 1999 the
exchange rate was 1.17 dollars per euro. The weakening of the dollar
seems to be related to concerns about the financing of the large and
growing current-account deficit in the USA, as well as the long-term
sustainability of the public finances. In a longer perspective, the current
1
rate of the dollar vis-à-vis the euro is not particularly low, cf. Chart 1.
The weakening of the dollar has been less pronounced in relation to a
number of other currencies, among them many Asian ones. The Bank of
Japan has sought to keep down the exchange rate of the yen via massive interventions during 2003 and in the current year. The effective
exchange rate of the dollar, i.e. measured against a broad basket of
currencies, has weakened by approximately 10 per cent since the beginning of 2002.
The economic upturn the 2nd half of 2003 has not resulted in higher
long-term interest rates. The US and the German 10-year governmentbond yields have both declined since the turn of the year and were approximately 4.1 per cent in mid-February, the same level as six months
earlier. The Japanese 10-year yield was 1.3 per cent. The fact that longterm interest rates have not risen as a result of the upturn, particularly
in the USA, could indicate widespread confidence in the market that
inflation will remain modest, even in the medium term. This should be
1
Before 1 January 1999 the dollar rate vis-à-vis the D-mark is applied.
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Chart 1
US DOLLAR VIS-À-VIS EURO
US dollars per euro
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
1990
1991
1992
1993
US dollars per euro
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Average 1990-2004
Note: Before 1 January 1999 the exchange rate of the dollar vis-à-vis the D-mark is applied. The latest observation is
from calendar week 7, 2004.
seen in the light of, inter alia, low and falling core inflation and moderate wage increases in the USA. Monetary-policy interest rates in the
USA, Japan and the euro area have remained unchanged since June
2003.
Chart 2
PRICE OF CRUDE OIL (BRENT)
Price per barrel
33
30
27
24
21
18
Jan
2002
Apr
Dollars per barrel
Jul
Oct
Jan
2003
Apr
Jul
Oct
Jan
2004
Euro per barrel
Note: The latest observation is from calendar week 7.
Source: EcoWin.
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The improved outlook for the US economy in particular has influenced
stock prices. In mid-February the S&P 500 index was more than 15 per
cent above the level in the summer. The European Stoxx 50 index has
risen correspondingly, while the increase in the Japanese Nikkei index
has been a little weaker.
Commodity prices in dollars continued their rising trend in the 4th
quarter and into 2004. Industrial metals, which are especially cyclically
sensitive, have increased even more – by almost 30 per cent since October. In euro terms the development has been more moderate. The price
increases are attributable to the improved growth prospects in the major industrialised countries, as well as strong underlying growth in demand from emerging market economies, notably China.
The oil price (Brent) in dollars has shown a rising trend since May 2003
and was just under 30 dollars per barrel in mid-February, only slightly
lower than the level up to the war in Iraq at the beginning of 2003. In
euro, however, the price has been more or less constant throughout the
period, cf. Chart 2.
THE INTERNATIONAL ECONOMY
USA
In the 4th quarter of 2003, GDP at constant prices increased by 1.0 per
cent over the 3rd quarter. Although this was only half the very high
growth rate seen in the 3rd quarter, it was significantly higher than the
rate of increase in the 1st half of the year, and presumably on the high
side of the potential output growth in the longer term. Growth was
broadly based with increases in private consumption, investments and
especially exports, which benefited from the low dollar rate.
Growth in the USA has been stimulated by highly expansionary fiscal
and monetary policy. Monetary policy has been expansionary worldwide,
whereas fiscal policy has been expansionary primarily in the USA. The
budget deficit was thus 4.9 per cent of GDP in 2003 and is expected to rise
further in 2004. The deficit reflects a strong reversal of the US economy
from a surplus of 1.4 per cent of GDP in 2000, cf. Chart 3, to a deficit that
is among the highest in the industrialised world. Only a marginal proportion of the deterioration is attributable to economic developments, while
the rest is a result of tax cuts and higher expenditure. The consolidation
achieved during the 1990s has thus been undone in a very short time. At
approximately 50 per cent of GDP, government debt is still lower than in
the euro area and particularly Japan, but higher than the UK level.
The question is whether the economic upswing will be self-sustaining
and thus continue when the expansionary effects of economic policy
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Chart 3
GOVERNMENT BUDGET BALANCE IN THE USA
Per cent of GDP
2
1
0
-1
-2
-3
-4
-5
-6
-7
1
2
3
Budget balance
4
5
6
7
8
9
10
11
12
13
14
Structural balance
Note: The structural balance shows the cyclically adjusted government budget balance.
Source: OECD, Economic Outlook no. 74.
subside. The increases in consumption and investments in the 2nd half of
2003 were stimulated by e.g. an extensive tax package including general
reductions of income tax, tax relief for families with children and increased deduction options for business enterprises. Some of these measures are, however, temporary. The President has proposed that they be
made permanent, which would worsen the outlook for the public
finances.
The sustainability of the upswing will also depend on the development
in the labour market. There are several approaches to calculation of US
employment, and they indicate different recent trends, cf. Chart 4. One
measure shows that employment has risen, while another indicates that
it has fallen. However, the upswing only seems to have had a relatively
small impact on employment thus far. "Jobless recovery" is a buzzword.
Positive elements include a strong housing market, which supports private consumption, and the stimulus to exports from the falling dollar.
Overall the prospects of continued substantial growth in the US economy in 2004 are good, and business confidence has also grown considerably, cf. Chart 5.
A risk which could jeopardise the upswing in the slightly longer term,
is the sustained large imbalances in the US economy. In addition to the
budget deficit there is a large current-account deficit, in 2003 approximately 5 per cent of GDP, cf. the article on the US current-account deficit and the dollar, p. 47ff. The deficit was previously to a large extent
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Chart 4
EMPLOYMENT IN THE USA ACCORDING TO TWO SOURCES
Million persons
150
140
130
120
110
100
90
80
70
60
1970
1975
1980
Household survey
1985
1990
1995
2000
Establishment survey
Note:
The household survey asks a sample of US households whether they are employed, while the establishment
survey asks a sample of business enterprises about their employment situation. One of the differences between
the two is that the establishment survey does not include the self-employed, agricultural employees and unpaid
family members. In addition, the establishment survey does not capture employment in new enterprises as fast as
the household survey. On the other hand, the establishment survey operates with considerably larger samples
than the household survey.
Source: EcoWin.
Chart 5
BUSINESS CONFIDENCE AND INDUSTRIAL PRODUCTION IN THE USA
Percentage balances
70
Per cent, year-on-year
8
60
6
50
4
40
2
30
0
20
-2
10
-4
0
-6
1998
1999
2000
2001
Industrial production, 3-month moving average (right-hand axis)
2002
2003
ISM, manufacturing
Note:
The ISM index shows the development in business confidence in the US manufacturing sector. The latest observation is from January 2004.
Source: EcoWin.
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financed by non-residents' purchases of US stocks, whereas in recent
years a significant percentage of financing has been attributable to the
purchase of US government bonds by Asian central banks – particularly
those of Japan and China. The foreign-exchange reserves of many Asian
countries are now larger than ever before.
Inflation, in terms of the consumer-price index, was 1.9 per cent in December. Consumer-price inflation excluding food and energy was 1.1 per
cent. Core inflation has been falling in recent years. The weaker dollar
exerts upward pressure on prices owing to higher import prices, but the
effect on consumer prices is limited since foreign trade does not constitute a large proportion of the US economy. Industrial wages are rising at
a rate of around 2.5 per cent per annum so typical industrial workers
have seen a positive development in real wages.
The Federal Reserve has maintained an unchanged Fed funds target
rate since June last year, when it was lowered by 0.25 per cent to 1 per
cent. In the assessment of the Federal Reserve, the risks concerning
growth and inflation, respectively, more or less balance, and consequently, "with inflation quite low and resource use slack, the Committee
1
believes that it can be patient in removing its policy accommodation" .
Japan
The Japanese economy has grown considerably over the past year, with
quarterly growth of 1.7 per cent in the 4th quarter. Growth was driven by
exports and business investments, while private consumption was weak.
The growth in Japanese exports is mainly attributable to the demand for
Japanese products in Asia, while the performance of sales in the USA and
EU was weaker.
For several years Japan has seen deflation, i.e. a fall in the general
price level. However, the deflationary trend has been weakening during
the past year, and towards the end of 2003 annual price increases,
measured by the consumer-price index, were only marginally negative.
This development is partly a result of temporary factors so there are no
immediate prospects of sustained positive inflation. The rate of wage
increase is close to zero.
In the long term, the weakening of the dollar and many Asian currencies pegged to the dollar may constitute a problem to the exportdriven Japanese economy. The Bank of Japan has therefore attempted
to contain the strengthening of the yen via massive purchases of dollars
for yen in the foreign-exchange market. The banks' liquidity has in-
1
Press release, Federal Reserve, 28 January 2004.
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creased, and combined with a monetary-policy interest rate close to zero
this means that monetary policy in Japan is highly expansionary.
The euro area
Unlike the USA and Japan, the euro area saw fairly weak growth in the
2nd half of 2003, at 0.4 per cent and 0.3 per cent, respectively in the 3rd
and 4th quarters over the preceding quarters. Growth in the 2nd half
was, however, stronger than in the 1st half.
Early signs of an upswing are mainly found in the confidence indicators.
Business confidence in the manufacturing sector was thus increasing towards the end of the year, but flattened out in December and January, cf.
Chart 6. The positive development in exports is threatened by the significant strengthening of the euro. It is doubtful whether the increased sales
opportunities in the export markets will fully compensate for the loss of
competitiveness. Sustained growth in the euro area economy will therefore to a large extent depend on the course of domestic demand, which
has remained more or less unchanged since 2001. However, the strengthening of the euro increases real income in the euro area member states.
With a continued weak labour market and ample spare capacity in the
business enterprises, the prospects of growth in domestic demand are,
however, only moderately positive. The February consensus estimate for
euro area growth in 2004 is 1.8 per cent.
BUSINESS CONFIDENCE AND INDUSTRIAL PRODUCTION IN THE EURO
AREA
Percentage balances
65
Chart 6
2000 = 100
105
60
102
55
99
50
96
45
93
40
90
1998
1999
PMI, manufacturing
2000
2001
2002
2003
Industrial production (right-hand axis)
Note: The PMI index shows the development in business confidence in the euro area manufacturing sector.
Source: EcoWin.
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Chart 7
DEVELOPMENT IN REAL GDP IN SELECTED EU MEMBER STATES
1st quarter 1995 = 100
130
125
120
115
110
105
100
95
1995
UK
1996
France
1997
1998
EU15
1999
Italy
2000
2001
Germany
2002
2003
Denmark
Source: EcoWin.
Unemployment in the euro area has stabilised in recent months and was
8.8 per cent in December, equivalent to more than 12 million unemployed. Initially, a moderate economic upswing will scarcely be sufficient
to reduce unemployment significantly since the business enterprises'
capacity utilisation is low, cf. above.
In 2003 the budget deficits of both Germany and France exceeded the
limit of 3.0 per cent of GDP stipulated in the EU Treaty for the second
year running. The deficits were just over 4 per cent of GDP, and the two
member states are also expected to exceed the limit this year, as is Portugal, cf. the European Commission's autumn forecast 2003. However, in
November the Council of Ministers of Economic Affairs and Finance, the
Ecofin Council, decided to suspend the excessive deficits procedure for
Germany and France so that no immediate sanctions will be imposed on
the two member states by the EU. The Commission has decided to challenge in the European Court of Justice the legal status and validity of
certain elements of the Council conclusions.
In terms of HICP, inflation in the euro area has fluctuated around 2.0
per cent in the last six months and thus been close to the ECB's target of a
rate of price increase below, but close to, 2 per cent in the medium term.
The considerable spare capacity helps to curb price rises, as does the appreciation of the euro. On the other hand, higher price-increase rates for
food, inter alia as a result of the drought in Southern Europe in the summer, have contributed a little to inflation. Looking ahead, higher indirect
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STRUCTURAL REFORMS IN GERMANY
Box 1
The German economy has for some time been characterised by relatively low growth
and high unemployment. Many experts, including the OECD and the IMF, have
pointed out that significant contributory factors are inappropriate structures, particularly in the labour market, and the way the social system works. In other words, structural reforms are called for rather than ordinary economic policy if Germany is to find
a sustainable way out of the present low growth.
The social-security schemes, i.e. health, unemployment, pension, care and accident
insurance, are key to the German social system. These schemes are to a large extent
financed via social taxes that act as a tax on work and thus contribute to placing German hourly costs among the highest in the OECD. At the same time, the working
hours are among the shortest. In addition, the labour market is relatively inflexible
compared to many other countries e.g. in terms of the companies' access to dismiss
superfluous labour and the limited options for flexible work planning.
On the costs side the demographic development, i.e. an ageing population, and
relatively high benefits, e.g. pensions, which almost entirely lie within the public sector, contribute to increasing public expenditure.
Previous reform measures have been limited and cautious, but in the spring of 2003
the German government launched a reform package, Agenda 2010, which was translated into a series of new measures during the year. Among the most important
labour-market reforms were reductions in unemployment benefits, tougher requirements for the long-term unemployed to accept job offers, and easier access for firms
with 5-10 employees to dismiss superfluous labour (the very small firms already had
this option). Outside the labour market, the criteria for receiving social benefits were
tightened.
Some economists, including the Germany economic advisors and the head of the Ifo
Institute for Economic Research, have expressed concerns as to whether the measures
adopted are sufficiently extensive and radical to solve the problems within the German economy. The reason is that the structural problems have been allowed to grow
considerably over the years. Experts point to the necessity to reduce the very high
hourly wage costs in the Germany manufacturing sector, as well as the necessity of
breaking down the very rigid wage structures, i.e. to achieve a more decentralised
wage-determination procedure. Both require the acceptance of the social partners.
Finally, it would be desirable to increase the incentives for low earners to seek work.
taxes on e.g. tobacco in Germany and France will also exert upward pressure on prices. Inflation excluding food, energy, alcohol and tobacco was
1.6 per cent in January and has been stable at this level for some time.
The ECB has not changed its interest rate since it was lowered by 0.5 per
cent to 2.0 per cent in June 2003.
Growth in Germany was negative in 2003 and overall growth during
the past three years has been practically zero. The unemployment rate
and budget deficit have both been increasing. Since the mid-1990s,
Germany has seen lower growth than the other EU member states, cf.
Chart 7.
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The German government is now seeking to kick-start the economy by
bringing forward tax cuts from 2005 to 2004 so that the total reduction
in 2004 will be approximately 15 billion euro, i.e. twice as large as originally planned. This makes it even more difficult to reduce the budget
deficit. At the same time, there is increasing acknowledgement that a
sustainable solution of Germany's economic problems cannot be obtained via fiscal-policy instruments alone. Structural labour-market reforms are also required. In 2003 a number of measures were adopted, cf.
Box 1. German economic advisors, among others, believe that these
measures are a step in the right direction, albeit insufficient.
UK
In the 2nd half of 2003, growth in the UK economy was more positive
than expected, and for the full year real GDP increased by 2.1 per cent,
driven by domestic demand.
Fiscal policy is expansionary and the government's original target for
the budget balance in 2003 was exceeded. In comparison with the preceding year the budget deficit increased from 1.5 per cent to 2.8 per
cent of GDP, and it is expected to deteriorate further in 2004. This development is primarily attributable to higher public expenditure for e.g.
healthcare and education.
Cash prices for owner-occupied housing have doubled since 1999, and
the rate of annual increase has been around 20 per cent in the last few
quarters. The ratio of average house prices to the households' disposable
income is now at the same high level as in the late 1980s, and now as then
households borrow extensively against the higher mortgageable value
resulting from the increasing house prices. However, the level of interest
rates is somewhat lower now than then, which makes it easier for the
households to service higher debt with a given disposable income.
The Bank of England raised its interest rate by 0.25 per cent to 4.0 per
cent at the beginning of February. In the last six months the pound has
followed the euro's strengthening vis-à-vis the dollar.
In December 2003 the Bank of England's inflation target was changed
by the Treasury, cf. Box 2.
Sweden
In terms of GDP growth the Swedish economy has fared relatively well
through the global recession. Increasing household wealth as a result of
rising house prices and recently also stock prices have buoyed up private
consumption, which has been robust in spite of a weak labour market.
Unemployment has been rising, e.g. as a result of fewer people in activation schemes, and towards the end of the year it exceeded 5 per cent.
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CHANGE IN THE UK INFLATION TARGET
Box 2
The Treasury has determined that the future UK monetary policy should be conducted
with the Harmonised Index of Consumer Prices, HICP, as the target variable. The target, which is symmetrical, is an inflation rate of 2 per cent +/- 1 per cent, i.e. practically the same as the ECB's target, which is, however, asymmetrical with 2 per cent as
the maximum.
Thus far the inflation target has been linked to the RPIX index. The difference between this index and HICP is firstly that the price of living in owner-occupied housing
is included in RPIX, but not in HICP, and secondly differences in the technical calculation methods. Since the mid-1990s inflation in terms HICP has been around 1 per cent
lower than RPIX inflation. Approximately half the difference is attributable to the calculation methods, while the rest is a result of the different compositions.
The new inflation target of 2 per cent is 0.5 per cent lower than the previous RPIXbased target, equivalent to the difference attributable to the different calculation
methods. The Bank of England finds that the change of target variable has not
changed the monetary-policy stance. Whether this will also apply in the future will
depend on the development in housing prices. The increases in HICP and RPIX were
1.4 per cent and 2.4 per cent, respectively, in January 2004 compared with January
2003.
Inflationary pressure is low. On the basis of the volatile energy prices,
Sveriges Riksbank has decided to attach importance to the price index
UND1X excluding energy. This index rose by 1.1 per cent in January. In
early February, Sveriges Riksbank lowered its interest rate by 0.25 per
cent to 2.5 per cent.
Norway
Unemployment in Norway has been growing in recent years and
reached 4.6 per cent of the labour force by the end of 2003. This is a
high level by Norwegian standards. At the same time, inflationary pressure is low. Core inflation, measured by the KPI-JAE index, was 0.4 per
cent in December and 0.1 per cent in January, e.g. as a result of considerable decreases in the shoes and clothing subindex. The rate of price
increase is thus far below the monetary-policy inflation target of 2.5 per
cent. Against that background Norges Bank lowered its interest rate by
a further 0.25 per cent in mid-December, and also in late January, to 2.0
per cent now. The rate of interest has thus been lowered by 5.0 per cent
since December 2002, to the lowest level since World War II. This is expected to boost the economy in mainland Norway, and there are indications to this effect.
From the beginning of 2003 until mid-February 2004 the Norwegian
krone weakened by approximately 20 per cent vis-à-vis the euro and
thus also the Danish krone.
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Hungary
The autumn saw renewed unrest in the financial markets in Hungary. At
the end of November the forint weakened significantly against the euro
within a few days. At an extraordinary meeting of the Monetary-Policy
Committee on 28 November the central bank decided to raise its interest
rate from 9.5 per cent to 12.5 per cent to counter the weakening trend.
The subsequent development has been highly volatile, and in midFebruary the forint was approximately 4 per cent weaker than immediately prior to the onset of the currency unrest. The forint remains within
the official fluctuation band vis-à-vis the euro of +/- 15 per cent around
the central rate of 282.36 forint per euro. The currency unrest in Hungary
has not affected the Polish and Czech currencies.
The Hungarian central bank operates with targets for both inflation
and exchange rate. Since the monetary-policy authorities have only one
instrument at their disposal – the rate of interest on the banks' accounts
with the central bank – the development in Hungary demonstrates the
risk that the targets might in principle clash when political priorities are
unclear.
THE DEVELOPMENT IN THE DANISH FINANCIAL MARKETS
Since October the krone has weakened marginally against the euro, and
the exchange rate in mid-February was kr. 7.45 per euro, i.e. slightly
stronger than the central rate of kr. 7.46038 per euro. In January Danmarks Nationalbank sold foreign exchange for almost kr. 10 billion net
with a view to keeping the krone stable. The sale of foreign exchange
continued in February. The net sales were to a large extent attributable to
pension companies requiring foreign exchange to purchase foreign securities. At end-January the foreign-exchange reserve was kr. 215 billion.
Danmarks Nationalbank has not changed its interest rates since June
2003, when the lending rate was lowered to 2.15 per cent. The currentaccount rate and discount rate are 2.0 per cent.
Danish long-term yields have shown the same pattern as the European
ones, and the 10-year government-bond differential to Germany has
been unchanged at approximately 20 basis points.
Recent monetary trends, illustrated by the financial statistics, support
the expectations of a cyclical reversal during 2004. Growth in lending by
banks and mortgage-credit institutes has been robust in spite of the sluggish development in investments and private consumption in the first
three quarters of 2003. Lending to households was 8.1 per cent higher in
December than in the same month of the preceding year. Loans have e.g.
been raised to finance residential investments, but the figures indicate
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Chart 8
LENDING BY BANKS AND MORTGAGE-CREDIT INSTITUTES
Per cent, year-on-year
25
20
15
10
5
0
-5
1998
1999
2000
2001
2002
2003
Lending by banks to households
Business lending by banks
Lending by mortgage-credit institutes to households
Business lending by mortgage-credit institutes
Source: Danmarks Nationalbank.
that some of the loan proceeds have been invested in financial assets,
which may be used to finance increased consumption in the future. However, pension savings accounted for some of the placements. Growth in
lending to the business sector has been somewhat slower over the past
year and was around 2.5 per cent higher in December 2003 than in 2002.
Growth in lending by mortgage-credit institutes to households has been
considerably higher than growth in lending by banks to households in
recent years. This pattern has changed over the last few months so that
the rates of increase were almost identical in December, cf. Chart 8. In
absolute terms, lending by mortgage-credit institutes to households is
approximately four times as high as lending by banks.
New statistics for the deferred-amortisation loans that have been
available to private borrowers since 1 October 2003 show that deferredamortisation loans for kr. 44 billion were granted in the 4th quarter of
2003, equivalent to 57 per cent of total gross new lending. Of the kr. 44
billion in deferred-amortisation loans, kr. 42 billion were adjustable-rate
loans, mainly with an initial fixation period of up to one year.
THE DANISH ECONOMY
The first release of national accounts showed reasonable growth in the
Danish economy throughout 2002, with a somewhat receding trend in
2003. After the latest revision this picture has, however, changed signifi-
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cantly so that the development in Denmark is more in line with that of
the euro area, i.e. a flatter course with weak growth in both years.
The preliminary quarterly national accounts for the 3rd quarter of
2003 show a fall in GDP in volume terms by 0.2 per cent for the second
quarter running. A decline in stocks, as well as a higher increase in imports than in exports, contributed to the negative growth. On the other
hand, private consumption grew by 0.5 per cent from the 2nd to the 3rd
quarter, inter alia as a result of an increase in new car purchases, which
had long shown a falling trend. Investments increased by 4.4 per cent,
redressing the fall in the two preceding quarters. Particularly machinery
investments developed positively. Residential construction showed zero
growth. The higher private consumption and investments explain a large
proportion of the increase in imports.
It is also worth noting that growth in public consumption has been
curbed in the last few quarters, and in the 3rd quarter of 2003 it fell by
0.5 per cent. Looking ahead, there are concerns as to whether the prospects of a change in the local and regional government structure in
Denmark might lead to an inexpedient transitional increase in localgovernment expenditure, particularly in the construction area. Against
this background the government has imposed a duty on the local governments to report planned investment measures. This does not imply
an approval process, however.
Manufactured exports rose in the 2nd half of 2003 after a significant
fall in the 2nd quarter, but the level was still lower than in the same
period of the preceding year. The value of agricultural exports decreased in 2003. Exports are impeded by the rising effective krone rate,
but in the long term they will benefit from the expanding international
export markets.
Imports also declined marginally in 2003 compared with the year before. Towards the end of the year imports to businesses and households
had, however, picked up again. The monthly seasonally adjusted trade
surplus was kr. 5-6 billion throughout 2003.
The current account of the balance of payments improved during 2003
and the full-year surplus was almost kr. 40 billion, compared to kr. 28
billion in 2002. The surplus is thus back at the high level seen in 2001.
This development is mainly a result of improvements on the balance of
services.
In the last three months of the year, the seasonally adjusted volume of
retail sales was 2.6 per cent higher than in the 3rd quarter, cf. Chart 9.
Car sales in the 4th quarter were higher than in the other quarters of
2003 and continued to rise in January 2004. Consumer confidence in
January, as in the preceding months, was positive, chiefly owing to an
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Chart 9
INDICATORS OF PRIVATE CONSUMPTION
2000 = 100
Percentage balances
130
10
120
8
110
6
100
4
90
2
80
0
70
-2
60
-4
50
-6
-8
40
2000
2001
Consumer expectations (right-hand axis)
2002
New passenger car registrations
2003
Retail sales index
Source: Statistics Denmark.
optimistic view of the household's own financial situation. The increase
in sales and imports of machinery, etc. indicates continued growth in
business investments, while the high housing prices will boost housing
construction. Stocks fell in both the 2nd and 3rd quarters. Overall economic growth in the 4th quarter is estimated to have been moderately
positive.
Seasonally adjusted employment has declined by approximately 50,000
in the past 18 months or so, primarily in the private sector. Unemployment continued to rise for the rest of the year and reached 6.6 per cent
in December. The uncertain labour-market conditions may help to curb
growth in consumption.
The domestic preconditions for an upswing in 2004 seem to be present. Disposable income is still rising since the rate of wage increase exceeds the rate of price increase and income taxes have been lowered. In
addition, the housing market is still strong. Deferred-amortisation loans,
which already enjoy great popularity, are also expected to contribute
moderately to growth in consumption. There is, however, much uncertainty as to when and how fast the positive factors will be reflected in
private consumption. Moreover, there is much uncertainty concerning
the outlook for the European, and particularly the German, economy.
The combination of a strong krone and wage increases that have long
exceeded those of Denmark's competitors has pushed up the real effective krone rate, which is an indicator of competitiveness, to a high level,
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Chart 10
COMPETITIVENESS AND THE KRONE RATE
1990 = 100
115
110
105
100
95
90
90
91
92
93
94
95
Real effective krone rate, consumer prices
Nominal effective krone rate
96
97
98
99
00
01
02
03
Real effective krone rate, hourly wages
Source: Own calculations.
cf. Chart 10. On the basis of the current account of the balance of payments, and to some extent the rate of unemployment, competitiveness
is still deemed to be good. Nevertheless, it has deteriorated. A more
subdued wage development would contribute to reversing the declining
trend in employment and would also be consistent with a sustainable
increase in real wages.
After reconciliation, a proposal has been submitted for a new collective agreement for e.g. the industrial sector. The collective agreement,
which will run for three years, comprises an increase in the pension contribution from 9 per cent to 10.8 per cent, a longer period with full
wages entitlement during maternity leave, and an increase in the minimum hourly wages by kr. 2.25 in each of the three years, to kr. 95.15. In
addition, the agreement includes improvements for wage-earners in
a number of other areas, e.g. higher inconvenience bonuses, higher
public-holiday payments and higher wages for apprentices. The agreement gives employers increased scope for varying the working hours at
local level in cooperation with the employees. The relevant organisations will now take a ballot on the proposal.
The social partners believe that the centrally negotiated collective
agreements increase costs to business enterprises by just under 1.0 per
cent per annum. This agreement could indicate some dampening of the
relatively high rate of wage increase that has persisted in Denmark for a
number of years, cf. Box 3, but the ultimate development in costs will
depend on the local negotiations in the individual enterprise.
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PRODUCTIVITY IN DENMARK AND THE EURO AREA
Box 3
For some time, Danish wages have been increasing at a faster rate than in most of
Denmark's competitor countries, including the euro area member states. At a given
exchange rate, an excess wage-increase rate in Denmark will tend to weaken Denmark's competitiveness, unless it is offset by an equivalent higher increase in productivity.
In the 2nd half of the 1990s the development in productivity was weaker in Denmark than in the euro area as a whole, while Danish wages in the private sector rose
at a higher pace. The result was a significant loss of competitiveness. From mid-2000
the situation changed. Danish wage increases still exceeded those of the euro area,
but there was an almost equivalent higher increase in productivity in Denmark, cf.
Chart 11. However, in recent years the latter mainly reflects a poorer development in
employment (the denominator) rather than higher GDP growth (the numerator) and
thus indicates considerable streamlining of Danish business enterprises. Higher employment would presumably require that the rate of wage increase in Denmark is
brought more in line with that of Denmark's competitors.
Productivity is difficult to calculate correctly. The Chart applies a productivity measure for the whole economy, i.e. growth in real GDP per person employed. However,
the pattern is more or less the same if we only look at productivity development in
the sector of the economy exposed to competition.
Chart 11
WAGES AND PRODUCTIVITY IN DENMARK AND THE EURO AREA
Per cent, year-on-year
3
2
1
0
-1
-2
-3
1995
1996
1997
Excess wage increase in Denmark
1998
1999
2000
2001
2002
2003
Excess productivity increase in Denmark
Prices
In January the consumer-price index was 1.1 per cent higher than in
January 2003. This is the lowest monthly rate of price increase for 10
years, reflecting e.g. the lowering of indirect taxes on alcohol and cigarettes in October 2003. The subindex for alcohol and tobacco, with a
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weighting of almost 5 per cent in the consumer-price index, has thus
decreased by more than 6 per cent over the last year. The index of net
retail prices, which is not affected by the lowering of indirect taxes, rose
by 1.5 per cent in January.
The contribution to inflation from imports and energy has also declined, inter alia as a result of the higher effective krone rate, which
makes imported goods cheaper in Danish kroner, as well as the high oil
price at the beginning of 2003. The rate of price increase is also expected to be very low in the months to come.
Domestic market-determined inflation (IMI) was 1.9 per cent in January. The declining import prices have not passed fully through to consumer prices. Typically a change in import prices is not fully reflected in
consumer prices in the short term so that profit margins move in the
opposite direction, acting as a shock absorber in consumer prices.
Danish inflation is still lower than inflation in the euro area, partly as a
result of the reduced indirect taxes. However, if energy and food, including alcohol and tobacco, are excluded, core inflation is higher in Denmark than in the euro area and has been so for a while.
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The Development in Cash Prices of OwnerOccupied Housing
Erik Haller Pedersen, Economics
CONCLUSIONS
After a sustained increase over many years, the prices of owner-occupied
housing – be it single-family houses, row houses, summer cottages or
owner-occupied flats – are at a historical high, cf. Chart 1. However, the
rate of increase has been declining in recent years. Notwithstanding the
high level, the increase in real-property prices is by and large attributable to the underlying pattern of the households' disposable incomes,
interest rates, and supply factors. Unless the Danish economy is hit by a
prolonged recession with rapidly rising unemployment or significantly
REGIONAL DEVELOPMENT IN REAL CASH PRICES FOR OWNER-OCCUPIED
HOUSING
Chart 1
1980 = 100
180
160
140
120
100
80
60
1980
1982
1984
1986
1988
1990
1992
Region 1
Region 2
Region 3
Regions 6 and 7
Region 8
Average
1994
1996
1998
2000
2002
Regions 4 and 5
Note:
Regions 1 to 3 comprise the broadly-defined metropolitan area (Greater Copenhagen plus the Counties of
Frederiksborg and Roskilde). Regions 4 to 8 comprise the rest of Denmark on an increasingly rural scale. See
Appendix 1 for details. The consumption deflator has been applied.
Source: Told og Skat, Ejendomssalg (Customs and Tax, Property sales).
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higher interest rates, there is little likelihood of major downward adjustments of cash prices, although price increases can be expected to be
more moderate in future.
As the Chart illustrates, the concept of one housing market is scarcely
valid any more. Up through the 1990s and in recent years the housing
market has shown an increasingly clear tendency to split, with considerably stronger price dynamics in the metropolitan area than in the rest
of Denmark. The same tendency, albeit weaker, was observed during
the upswing from 1982 to 1986. This price gap is not likely to narrow
significantly in the near future.
It is believed that the introduction of adjustable-rate loans in 1996,
viewed in isolation, had a small positive effect on cash prices, raising
them by approximately 4 per cent. The introduction of deferredamortisation loans will scarcely have any major impact on cash prices,
but could have a marginally expansionary effect in the short term.
DEMAND FOR OWNER-OCCUPIED HOUSING
From a theoretical point of view, the major factors affecting the cash
prices of owner-occupied housing are: the households' real disposable
incomes, interest rates, construction costs, and the expectations of future increases in house prices.
The ratio of the households' real disposable incomes to the stock of
houses has been increasing since the early 1990s, cf. Chart 2. The volume
and quality of owner-occupied housing have thus not increased at the
same rate as real income after tax. This factor alone could explain the
rising trend in cash prices in that the demand for housing traditionally
increases at more or less the same rate as incomes.
Chart 2 includes real first-year instalments. These include interest expenditure after tax, redemptions and property taxes, but not utilities.
The first-year instalment, shown for financing at a short- and long-term
interest rate, respectively, is close to the net instalments typically shown
on the estate agents' sheets of information. The first-year instalment
gives an idea of the liquidity burden for a first-time buyer and thereby
illustrates how difficult it is to enter the market for owner-occupied
housing. Real first-year instalments rose from 1993 to 2000, but have
subsequently levelled off.
The first-year instalment comprises redemptions on loans for financing
the home and thus represents both actual financing costs and savings
invested in the home. Since redemptions are part of the first-year instalment, the latter becomes sensitive to the rules for mortgage-credit
lending, e.g. in terms of maturity, loan type, etc. The newly introduced
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Chart 2
FACTORS DETERMINING THE COSTS OF HOME OWNERSHIP
1980 = 100
Per cent
140
18
120
16
100
14
80
12
60
10
40
8
20
6
4
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Real disposable income / stock of houses
First-year instalment, short-term interest rate
First-year instalment, long-term interest rate
User cost excluding expected capital gains (right-hand axis)
Note:
The first-year instalment comprises financing costs after tax and redemptions, as well as property taxes. The real
first-year instalment for the short-term interest rate is calculated using adjustable-rate loans for the period from
1996 onwards deflated by consumer prices. The user cost excluding expected capital gains shows interest after
tax plus property taxes plus depreciation, cf. Appendix 2.
Source: Realkredit Danmark and Mona's data bank.
mortgage-credit loans with deferred amortisation for up to 10 years will
immediately lower the first-year instalment considerably for buyers opting for such loans.
In theory, capital costs, also known as the user cost, are a better and
more adequate expression of the costs of owning and occupying a home
over a number of years, see Appendix 2. The user cost is not effected by
changes in the redemption profile of loans, but purely by the development in interest after tax, property taxes, the depreciation rate, and the
expected future price increases. Houses and flats are durable goods, and
in a forward-looking perspective the real costs of owning one's home
depend on the development in its price. This is in line with the general
perception that a good time to invest in housing is when significant increases in housing prices are expected. Expectations of higher cash prices
and thus capital gains thereby have a downward impact on the real
costs of owning and occupying a home.
Chart 2 shows the development in the part of the user cost that comprises interest after tax, property taxes and depreciation, but excludes
expected capital gains. Taxation of housing generally has a dampening
effect on fluctuations in market prices of owner-occupied housing since
increases in cash prices as a result of higher demand are less pronounced
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Chart 3
THE REAL "RENT" PAYABLE BY OWNER-OCCUPIERS
1980 = 100
225
200
175
150
125
100
75
50
25
0
1980
1982
1984
Copenhagen
1986
1988
Rural areas
1990
1992
1994
1996
1998
2000
2002
Average
Note:
"Rent" has been calculated as the user cost including expected capital gains multiplied by the index of real cash
prices, cf. Appendix 2.
Source: Told og Skat (Customs and Tax) and Mona's data bank.
when taxes also rise. Likewise, price falls are moderated. Taxation of
housing is one of the reasons why the user cost did not fall as much as
interest rates during the 1990s.
To obtain the level of real costs, the user cost including expected
capital gains is multiplied by the real cash price of owner-occupied
housing. The expected capital gains, shown in Chart 7, attempt to capture the households' expectations of future increases in the price of
the home since these must be included in a theoretically correct cost
measure, cf. above. The product of total user cost and the real cash
price shows the real "rent" that the owner pays to live in his or her
home.
In 2003 the real "rent" for the housing market taken as one was close
to its historical average, cf. Chart 3. Adjusted for general price trends,
owning a home is therefore not more expensive today than it was previously, but there are large regional differences. In the metropolitan
area, real "rent" is at a high level.
The drop in the calculated "rent" in the mid-1980s reflects expectations at the time that cash prices would continue to rise significantly,
which had a downward effect on the user cost – including expectations
of capital gains – cf. above. These expectations were not met, and the
user cost increased again in the latter half of the decade.
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SUPPLY OF OWNER-OCCUPIED HOUSING
1
While interest rates and – to some extent – taxation are the same
throughout Denmark, the development in incomes may differ from region to region. However, the supply of owner-occupied housing is the
clearest indicator of the regional differences between the metropolitan
area and the rest of the country.
In the short term the supply of housing is constant, and changes in
demand are thus directly reflected in cash prices. Fluctuations in housing
prices are therefore a natural element of the housing market and do not
necessarily reflect price bubbles or the like.
If housing prices continue to rise, the cash price of owner-occupied
housing will at some point exceed the costs of building a new home. If
there are vacant building plots and spare capacity in the construction
sector, this will boost new building, thus exerting downward pressure on
housing prices. If there are vacant plots, cash prices will in the long term
increase in line with the increase in construction costs and thus follow
2
the general level of prices . In that case there will not be any real capital
gains on housing.
The situation is fundamentally different if the number of vacant building plots is insufficient, e.g. because the region has been fully built-up,
or because no more land has been zoned for residential purposes. If so,
the price of land and property could continue to rise as long as demand
is increasing, and homeowners will see real capital gains. Housing prices
will also become more volatile over time. This scenario resembles the
situation in the metropolitan area in the last 10 years, although this area
has also seen some construction activity. Underlying factors include
demographic shifts between regions (urbanisation), changing living patterns (e.g. more singles) and differences in economic growth.
The split housing market is clearly illustrated in Chart 4, showing residential investments at constant prices and the relative cash price, i.e. the
ratio of the price of existing housing to the price of new building. The rise
3
in housing prices since 1993 has boosted residential investments . There
can be no doubt that cash prices have reached a level where it often pays
to build a new home.
1
2
3
The progression in property-value tax mainly affects the metropolitan area. On the other hand, this
area derives the greatest benefits from the tax freeze in the housing sector. Land tax also varies from
municipality to municipality.
This presumes that productivity development in the construction sector does not systematically
deviate from the general course of productivity in the economy.
Residential investments are affected by reparation of damage caused by the hurricane in December
1999. This explains the uneven trend towards the end of the period.
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Chart 4
RELATIVE CASH PRICE (TOBIN'S Q) AND RESIDENTIAL INVESTMENTS
1980 = 100
150
Billion 1995-kroner
70
120
60
90
50
60
40
30
30
0
20
1980
1982
1984
1986
1988
1990
Region 2
Whole country
1992
1994
1996
1998
2000
2002
Regions 6 and 7
Residential investments (right-hand axis)
Note:
Relative cash price calculated as the ratio of the cash price to the deflator for residential investments. The size
shows the ratio of prices for existing housing to new building. Region 2 is the County of Copenhagen, while
regions 6 and 7 cover smaller municipalities and provincial towns, but not decidedly rural municipalities, cf.
Appendix 1.
Source: Told og Skat (Customs and Tax) and the Mona data bank.
Chart 5
NEW BUILDING OF OWNER-OCCUPIED HOUSING
1,000
2,500
m2
2,000
1,500
1,000
500
0
1990
1991
1992
1993
1994
Metropolitan area
1995
1996
1997
1998
1999
2000
2001
2002
2003
Rest of Denmark
Note: Estimates for 2003.
Source: Statistics Denmark, National accounts.
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Residential investments comprise both new building and improvements
to and maintenance of existing housing, including urban renewal. The
national accounts for new building by region show that growth in new
building is clearly strongest outside the metropolitan area, cf. Chart 5,
although the gap between the price of existing housing and the price of
1
new building is widest in the metropolitan area. As stated above, this
reflects the shortage of building plots. Land prices in Denmark have
2
increased at a higher rate than cash prices during the last 20 years .
It is therefore hardly likely that the price gap between the metropolitan
area and the rest of Denmark will narrow significantly in the near future.
In many ways it is more relevant to compare prices in the metropolitan
area with prices in other cities such as Stockholm, Helsinki or Hamburg
rather that comparing with rural areas in Denmark, and in an international perspective Copenhagen is not particularly dear. A similar pattern,
i.e. a housing market split between the metropolitan region and the rest
3
of the country, is seen in many other European countries .
THE DEVELOPMENT IN CASH PRICES
The preceding pages describe the key factors determining the development in house prices. Danmarks Nationalbank's economic model, Mona,
captures these factors in a house-price relation where housing prices are a
function of income, user cost and the stock of owner-occupied housing,
cf. Appendix 3. Unemployment, which is often said to determine the
course of property prices, is not directly included in this house-price equation, but is reflected indirectly via incomes. The supply is included via a
relation for residential investments.
A house-price relation of the above nature is not fully able to explain
the increases in cash prices in recent years. This is illustrated by positive
residuals since 1998, cf. Chart 6. On a quarterly basis, the residuals show
the difference between the actual price development and the development predicted by the house-price equation.
This may have several causes. Firstly, there are indications of a structural break in housing demand in the late 1990s after the adoption of
the 1998 Whitsun Package of Economic Measures, which made it less
attractive to invest in e.g. capital pensions. This may have stimulated the
demand for housing in general and summer cottages in particular as
alternative investments.
1
2
3
Investments in urban renewal, façade renovation and the like are not included in the new-building
figures. Traditionally most of these investments have been made in the metropolitan area.
See Told og Skat, Ejendomssalg (Customs and Tax, Property sales).
See Structural Factors In The EU Housing Markets, European Central Bank (2003).
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Chart 6
ACTUAL AND ESTIMATED CASH PRICES
1980 = 100
Per cent, quarter-on-quarter
6
350
300
4
250
2
200
0
150
-2
100
-4
50
-6
1980
1982
1984
1986
Nominal cash prices
1988
1990
1992
1994
1996
1998
Residuals, long-term rate (right-hand axis)
2000
2002
Residuals, short- and long-term rates (right-hand axis)
Note:
The residuals show the difference between the actual and estimated cash prices. Positive residuals thus indicate
that the cash-price equation has not been fully able to explain the price increases. If the interest-rate series from
the Association of Danish Mortgage Banks are applied instead of the long-term rate alone, cf. Appendix 3, the
residuals are reduced.
Source: The Association of Danish Mortgage Banks and own calculations using the Mona model's cash-price relation.
Secondly, the house-price relation estimates the average price development and thus does not fully take into account that some areas, such
as the metropolitan area, may be particularly price sensitive owing to
supply.
EFFECT OF ADJUSTABLE-RATE LOANS ON CASH PRICES
Box 1
Chart 6 shows the result of estimating and projecting the house-price relation using
respectively a long-term mortgage-credit rate and an interest rate taking account of
adjustable-rate loans. As can be seen, a house-price relation in which adjustable-rate
loans are taken into account in the user cost is better at explaining the development
(i.e. lower average residuals and lower standard deviation on these) than if only a
long-term rate is applied. Differences in residuals can be translated into a cash-price
level, which gives an estimate of the effect of adjustable-rate loans on cash prices.
Calculated in this way, the figures show that the extensive use of adjustable-rate
loans, viewed in isolation, has pushed cash prices for owner-occupied housing upward
by approximately 4 per cent.
This calculation does not consider the circumstance that short-term interest rates
are typically lower than long-term interest rates, but also entail a higher risk. One interpretation of the result might be that buyers opting for adjustable-rate loans have
not fully taken into account the increased risk, possibly because the Danish market
has not seen any period of significantly increasing interest rates since the introduction
of this loan type.
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A third factor is the introduction of adjustable-rate loans in 1996, which
made it possible to finance housing at short-term interest rates via
mortgage-credit institutes. Calculations show that adjustable-rate loans,
viewed in isolation, have boosted cash prices for owner-occupied housing a little, cf. Box 1 and Appendix 3.
THE SIGNIFICANCE OF THE INSTITUTIONAL AND LEGAL FRAMEWORK
In addition to the above factors, property prices are affected by the institutional and legal framework for home financing. The framework for
mortgage-credit activities has undergone significant changes over the
past 20 years, thanks to extensive liberalisation.
One result of the liberalisation measures has been a large increase in the
number of mortgage-credit products offered. Today a borrower may
choose between fixed- and adjustable-rate loans, between bond, cash and
index-linked loans, between euro- and krone-denominated loans, between loans with different redemption profiles and maturities, etc. Danmarks Nationalbank has supported the gradual liberalisation process and
welcomed product development. At the same time, the need to advise
the borrower on the ever more complex choice of product has been emphasised to ensure that borrowers are aware of the risks incurred.
The legal framework within which mortgage-credit institutes operate
may in itself affect property prices, cf. above on the possible effects of
adjustable-rate loans and deferred-amortisation loans. The liberalisation
measures have, however, been introduced gradually to give the market
an opportunity to adapt.
The above development with a still wider product range is not a
purely Danish phenomenon, but can also be found in a number of other
countries with other traditions and institutions for home financing.
The Danish mortgage-credit system ensures that even small loans can be
raised on financial-market terms with a low interest-rate margin. Consequently the Danish mortgage-credit system has attracted increasing interest from abroad in recent years.
The gilt-edged status of mortgage-credit bonds is founded on a number
of key legislative elements which impose certain restrictions on the activities of mortgage-credit institutes, but which are also prerequisites of the
1
soundness of the system. This is particularly true of the balance principle ,
which ensures a high degree of coherence between the terms and conditions for loans and the underlying bonds. The balance principle, which has
been central to Danish mortgage-credit legislation since the mid-19th
1
Danmarks Nationalbank supported the adjustments of the balance principle which took place in 1989
and 2001, respectively.
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century, is actually a simple type of risk management within mortgagecredit institutes and has helped to steer them safely through periods with
significant fluctuations in interest rates and prices. The mortgageable limit
of 80 per cent of the market value and the maximum maturity of 30 years
for mortgage-credit loans are other important elements.
DEFERRED-AMORTISATION LOANS
On 1 October 2003, deferred-amortisation mortgage-credit loans were
introduced in the Danish market. Amortisation can be deferred for up
to 10 years, but subsequently the loan can be refinanced via a new
deferred-amortisation loan. The 10-year rule thus primarily ensures that
the collateral, i.e. the property, is reassessed if the borrower wants to
raise a new loan. The new product is already available in several versions
– as fixed- or adjustable-rate loans, and with the deferred-amortisation
period placed in the first 10 years of the loan term (which can be up to
30 years) or an "opt-in" model under which deferred amortisation can
be selected and deselected as required. The range of mortgage-credit
products has thereby been expanded further.
The impact of the new type of loans on the housing market and the
economy in general will to a large extent depend on the behaviour of
borrowers. If borrowers take a holistic approach to their finances, the
deferred-amortisation loans are in principle not revolutionary. During
the last 10 years there has been general access to supplementary mortgage credit, and various reversed mortgage products are already available in the market. Consequently, nobody has involuntarily had to
accumulate large savings in the home. At most, the deferredamortisation loans make it a little easier and cheaper not to accumulate
free mortgageable value in one's home in excess of the value accrued as
a result of rising cash prices.
However, if borrowers take a very narrow approach to their finances,
mainly focusing on the first-year instalment after tax, the deferredamortisation loans may have an impact on savings and cash prices. The
first-year instalment after tax can be considerably lower for a deferredamortisation loan than for a traditional loan. As described above, the
user cost is not affected by the redemption profile of the loan.
In general, the majority of borrowers must be presumed to consider
their overall financial situation when deciding whether to raise a
deferred-amortisation loan, but there will be a tendency for the
deferred-amortisation loans to support cash prices. Initially the new
loans have mainly appealed to middle-aged people in owner-occupied
housing with a high free mortgageable value.
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OTHER EFFECTS OF THE INCREASE IN CASH PRICES
Housing prices are important in a number of contexts outside the housing market. Above all, housing prices determine the value of the stock
of houses, which in turn constitutes a significant part of the households'
wealth, which – together with incomes – determines private consumption. Traditionally capital gains are reflected in higher consumption for a
while. However, the increase in wealth since 1998 has had a surprisingly
small effect on private consumption in Denmark. This is in contrast to
the development in certain other countries, including the UK.
The reasons why the increase in the households' wealth has not had a
more significant impact on private consumption may be a considerable
reduction of the tax value of interest deductibility in this period, as well
as wider acknowledgement than previously of the need to save up for
one's pension. It is assessed that the introduction of deferred-amortisation loans will not in itself entail a significant change in the propensity
of households to save.
Housing prices also have an, albeit indirect, impact on inflation, on
credit expansion and thus financial stability, and on the distribution of
wealth in the Danish society. These issues will not be considered further
here. For a more detailed analysis of the impact of housing prices on
financial stability, see Financial Stability, Danmarks Nationalbank (2002).
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APPENDIX 1
Municipal grouping of owner-occupied housing applied by Customs and
Tax:
Group 1:
The Cities of Copenhagen and Frederiksberg.
Group 2:
All municipalities in the County of Copenhagen.
Group 3:
All municipalities in the Counties of Frederiksborg and
Roskilde.
Group 4:
Other municipalities with more than 50,000 inhabitants in
the largest urban area.
Group 5:
Other municipalities with 20-50,000 inhabitants in the largest
urban area.
Group 6:
Other municipalities with 10-20,000 inhabitants in the largest
urban area.
Group 7:
Other municipalities with 5-10,000 inhabitants in the largest
urban area.
Group 8:
Other municipalities with up to 5,000 inhabitants in the
largest urban area.
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APPENDIX 2
A model calculation of the costs of home ownership (user cost) typically
includes the following elements:
user cost = interest after tax + housing tax as a percentage of property
value + depreciation rate – expected capital gains
A falling level of interest rates makes dwelling cheaper, while lower
interest deductibility and higher property taxes make it dearer. The development in these two factors and the rate of depreciation are shown
in Chart 2.
Lower inflation expectations increase the user cost since the expected
capital gains on the home purchased are lower. The perception that a
housing purchase will result in capital gains thus helps to reduce the real
housing costs.
The first part of the expression is standard, whereas the expected capital gains can be calculated in several ways, particularly when it comes to
modelling the expectations. Inflation expectations may be created extrapolatively or regressively, depending on the degree to which historical
series are included. In practical modelling it is a question of whether,
and to which degree, price series should be smoothed (on regressive
formation of expectations). For regressive expectations, a large increase
in cash prices will lead to expectations of a future fall, while there will
be expectations of further increases and thus possibly a price bubble in
the extrapolative case.
In practice, an assessment of the expected price increase in the housing market may include several elements. For instance, more than one
price development may be considered. The most obvious candidates are
consumer prices, construction costs and the cash prices themselves.
The expected development in house prices cannot be measured directly,
so any estimations must be indirect. In Danmarks Nationalbank's Mona
model, on which this Appendix is based, expected capital gains are estimated as an integral part of the cash-price relation. Specifically, consumer
prices, primarily filtered consumer prices, and house prices are included
in the determination of expected capital gains in Mona's house-price
1
relation . Filtering smoothes consumer prices and removes the impact of
individual shocks to prices. This leaves a softer underlying tendency in the
price index and its rate of increase.
1
For a more detailed description of this, see MONA – a quarterly model of the Danish economy, Danmarks Nationalbank (2003).
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In the estimation of the house-price relation, the coefficients for the
rates of increase in consumer and house prices add up to the coefficient
for the nominal rate of interest. The weighed rates of increase can thus
be seen as the rate of increase for a real interest rate.
The expected price increase thereby determined is more subdued than
the actual year-on-year increase in cash prices. However, a pass-through
from the actual development in the prices of owner-occupied housing
can be observed. For instance, the expected price increase declined
around 1980 when growth in cash prices subsided, but picked up again
around the mid-1980s when cash prices increased after the fall in interest rates, cf. Chart 7 showing the expectations part of Mona's user-cost
expression.
Since the mid-1990s the series of expected capital gains has been at a
level of around 2½ per cent. Inflation expectations have generally been
declining over time and are now close to the expected increase in cash
prices in the long term, outside the metropolitan area at any rate. The
Chart also shows the expected price deflator for residential investments
as defined in the Adam model. This is an indication of the development
in cash prices in the long term.
The real "rent" for an owner-occupier is calculated as the user cost as
described above multiplied by an index of the real cash price, i.e.
real "rent" = user cost*cash price/consumption deflator, cf. Chart 3.
Chart 7
INFLATION PART OF THE USER COST AND INCREASE IN CASH PRICES
Per cent
25
20
15
10
5
0
-5
-10
75
77
79
81
83
85
Inflation adjustment (Mona defginition)
Increase in cash prices, year-on-year
87
89
91
93
95
97
99
01
03
Deflator for residential investments
Source: Mona databank and Adam databank (the rpibhe variable).
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APPENDIX 3
For the purposes of this article, the cash-price relation in the Mona
model has been reestimated applying a long-term mortgage rate up to
1996, and a weighted average of the Association of Danish Mortgage
Banks' series for long- and short-term mortgage rates, respectively, from
1997 onwards. The weight of the short-term rate is calculated as the
percentage of adjustable-rate loans in new lending by mortgage-credit
institutes, cf. the MFI statistics. At present this percentage is approximately 50.
The result of the reestimation is shown below.
The estimated equation, cf. Table 1, has subsequently been projected
using the long-term mortgage rate and the weighted rate, respectively,
and the two projections have been compared to the actual development. This gives two sets of residuals calculated as the actual development less the estimated development. As Chart 6 shows, we get closer to
an explanation of the development in cash prices if we include adjustable-rate loans. The differences in the residuals are then "translated"
into a cash-price level by dividing the average difference in the residuals,
i.e. 0.32 per cent, by the coefficient for the lagged real cash price in the
reestimated equation (0.0907). Thus an estimate is achieved of the impact of adjustable-rate loans on cash prices.
CASH-PRICE EQUATION
Table 1
Variable
Name
Coefficient
t value
House price
∆log(kp)
Consumption deflator
∆log(pcp)
User-cost change
∆(rente + ssats )
Lagged user-cost change
∆(rente-1 + ssats-1 )
User cost
rente-1 + ssats-1 + 0,01
Expected change in consumption
dpcpe-1
deflator
Expected change in house price dkpe-1
Real house price
log(kp-1/pcp-1)
Real income/stock of houses
log((ydp-1 - ipv-1)/pcp-1) - log(fwh-1)
Constant
0.2531
-3.7589
-0.7370
-0.8505
1.3
9.0
1.7
2.8
0.8666
0.1706
-0.0907
0.0569
0.0706
2.5
2.7
3.6
2.1
3.9
T = 1974:2 – 1999:4
R2 =
0.6767
Se
Note:
DW
JB
=
=
1.695
0.803
AR(1) = 2.499
AR(4) = 6.388
=
0.0166
The relation is estimated by restricted OLS. The restriction equals the sum of price-increase coefficients for the
interest-rate coefficient. Furthermore, income elasticity in housing demand is restricted to 1.
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Developments in the Danish Bond Market
since 1970
Ulrik Knudsen and Michael Sand, Market Operations
INTRODUCTION AND SUMMARY
The Danish bond market has changed radically since 1970.
At that time it almost exclusively comprised mortgage-credit bonds.
Today mortgage-credit bonds and government securities make up 2/3
and 1/3, respectively, of the total bond market in Denmark.
Until the mid-1970s callable annuity bonds dominated the Danish
bond market. This pattern changed with the renewed issue of serial-loan
bonds by the central government. In 1983 the central government introduced bullet issues, and since then the percentage of bullet loans has
been increasing. This trend reflects the central-government borrowing
strategy, as well as the popularity of adjustable-rate loans from the late
1990s. Today the circulating volume of bonds comprises callable annuity
bonds and uncallable bullet issues, with an overweight of the latter.
The total krone duration in the Danish bond market has declined since
mid-1999. This is attributable to the changed composition of the circulating volume of mortgage-credit bonds, in that the proportion of
adjustable-rate bonds has increased, and to the development in interest
rates, which has reduced the krone duration of the callable mortgagecredit bonds.
ISSUING AND BORROWING ACTIVITY IN THE BOND MARKET
The central government and the mortgage-credit institutes are the prin1
cipal issuers of Danish bonds. The first domestic Danish government
2
bond loan was raised in 1785. In the following years the issue of government bonds increased, and the growing turnover resulted in regular
bond quotations on Københavns børs (the Copenhagen exchange) in
1
2
Special institutions (including KommuneKredit and Danish Ship Finance), government-guaranteed
entities (e.g. A/S Storebælt) and private enterprises are also significant issuers of bonds.
The first Danish government-bond loan was raised in Amsterdam in 1757, cf. Statistics Denmark,
Statistical Reports no. 24 – Credit-Market Statistics (in Danish), 1969.
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1810. Some 10 years after the issue of the first domestic Danish government bond, the first mortgage-credit loan was arranged in Denmark.
After the fire of Copenhagen in 1795 there was a need to reconstruct a
large number of the destroyed buildings. Consequently, the first Danish
mortgage-credit institute, Kreditkassen for Husejere i Kjøbenhavn (the
Credit Fund for Houseowners in Copenhagen), was established in 1797.
With the Constitution of 1849 freedom of association became a statu1
tory right, and in 1850 the first Danish mortgage-credit act was passed.
The framework for the mortgage-credit market has changed radically
over the years, partly as a result of increased legislative liberalisation,
partly as an element of economic policy, e.g. as an instrument of adjustment. Among other things, this has entailed a much higher degree
of concentration, so that there are now only 7 Danish mortgage-credit
issuers left, compared to 25 in the early 1970s. Box 1 outlines the development in the Danish bond market. The Appendix includes definitions
of a number of bond-market concepts.
The Danish bond market as a percentage of GDP grew strongly up to
the mid-1980s and then stabilised, cf. Chart 1. Until the late 1970s the
Danish bond market almost exclusively comprised mortgage-credit
bonds. Subsequently, the issue of government securities increased significantly, and these two groups now dominate the bond market in
Denmark, accounting for around 2/3 and 1/3, respectively, of the outstanding volume of bonds.
The shift is mainly attributable to the considerable government deficits in the late 1970s and up until the mid-1980s, which entailed an
equivalent central-government borrowing requirement. The circulating
volume of government securities therefore increased significantly in this
period. In 1989-97 the government balance was negative once again,
resulting in growth in the volume of government securities.
The circulating volume of mortgage-credit bonds has increased steadily since 1970. Among other things, this reflects a higher pledgeable
value. In addition, amendments to mortgage-credit legislation have had
a major impact on the issuance activity, cf. Box 1. Liberalisations have
thus been a significant factor contributing to the households' increased
borrowing from mortgage-credit institutes, to some extent at the cost of
bank loans.
In the latter half of the 1990s adjustable-rate loans were reintroduced
in the Danish mortgage-credit market. Unlike traditional callable annuity loans, adjustable-rate loans are financed via uncallable bullet bonds
1
See Michael Møller and Niels Chr. Nielsen, 200 Years of Mortgage Credit in Denmark (in Danish),
1997.
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THE STRUCTURE OF THE DANISH BOND MARKET SINCE 1970
Box 1
1970: Mortgage-credit reform: The maximum term to maturity for mortgage-credit
loans is reduced to 30 years, whereby 30-year fixed-rate callable annuity bonds
become the dominant financing option1; one-tier mortgaging is introduced,
entailing a higher degree of concentration among mortgage-credit institutes.
1975: The central government resumes the issue of fixed-rate serial-loan bonds.2
1976: The central government resumes the issue of fixed-rate Treasury notes (redeemed as bullet loans); in connection with special mortgage credit for new
owner-occupied housing, mortgage-credit institutes may offer adjustable-rate
loans financed via 1- to 5-year uncallable bonds amortised as bullet loans.
1980: Mortgage-credit reform: General option to raise cash loans (repealed in 1985),
including adjustable-rate loans; the quota for mortgage-credit loans for residential properties is repealed.
1982: Financing of mortgage-credit loans via index-linked bonds is introduced
(mainly uncallable bonds redeemed according to the serial-loan principle).
1983: The central government introduces fixed-rate bullet government-bond loans.
1984: The central government introduces variable-rate bullet government-bond
loans (issuing ceases in 1990).
1986: Mixed loans a requirement in connection with e.g. change of ownership and
construction of new owner-occupied housing (part of the Potato Package of
Economic Measures). Loans are thus financed via a combination of callable
annuity and serial-loan bonds.
1988: Serial-loan bonds are no longer included in the central government's on-therun issues.
1989: Mortgage-credit reform: Freedom to establish new mortgage-credit institutes.
1990: The central government introduces Treasury bills as zero-coupon bonds.
1992: Access to free mortgaging within 80 per cent of the value for owner-occupied
housing via mixed loans with maturities of up to 30 years.
1993: 30-year annuity loans for owner-occupied housing are reintroduced.
1996: The mortgage-credit institutes reintroduce adjustable-rate loans, primarily
financed via the issue of uncallable fixed-rate bullet bonds with maturities of
1 to 11 years (adjustable-rate bonds).
2003: Introduction of mortgage-credit loans with deferred amortisation for up to 10
years, financed via traditional fixed-rate callable bonds or adjustable-rate bonds.
Note: For acts of Parliament, the year is the year of adoption, not the year of implementation.
Source: Various editions of annual reports from the Association of Danish Mortgage Banks, the Mortgage-Credit
Act, Danish Government Borrowing, Danish Government Borrowing and Debt, and Report and Accounts,
Danmarks Nationalbank.
1
In the period analysed, uncallable annuity bonds constitute a limited percentage of the total Danish bond
market.
2
Government securities (government bonds, Treasury notes and Treasury bills) are uncallable.
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Chart 1
DEVELOPMENT IN THE BOND MARKET
Kr. billion
2,500
Per cent of GDP
180
2,250
160
2,000
140
1,750
120
1,500
100
1,250
80
1,000
60
750
40
500
20
250
0
0
1970
1973
1976
1979
Government securities
1982
1985
1988
Mortgage-credit bonds – other
1991
1994
Other bonds
1997
2000
2003
Mortgage credit – adjustable-rate loans
The bond market as a percentage of GDP (right-hand axis)
Note:
Nominal values at the end of January, April, July and October (to avoid an impact from the refinancing activities
in December). Index-linked bonds are stated at the indexed value. Government securities comprise government
bonds, Treasury notes and Treasury bills. Government bonds denominated in foreign exchange have been
excluded. ”Other bonds” comprise e.g. issues by special institutions, government-guaranteed entities and private
enterprises. Data for adjustable-rate loans are available from January 1999 onwards. The observations for
January and April 1994 illustrate a massive wave of conversions.
Source: Statistics Denmark and Danmarks Nationalbank.
1
with short maturities, known as adjustable-rate bonds. At end-2003 the
volume of adjustable-rate loans was kr. 498 billion, of which kr. 85
billion was denominated in euro, equivalent to around 1/3 of total
mortgage-credit lending.
The surge in the volume of adjustable-rate loans since 2000 is mainly attributable to an increasing positive spread between long-term and shortterm interest rates, which initially makes adjustable-rate loans cheap. In
2
addition, the economic situation is generally perceived to be stable.
Since October 2003 mortgage-credit institutes have been able to offer
loans with deferred amortisation for up to 10 years. Statistics from the
Association of Danish Mortgage Banks show that deferred-amortisation
loans constituted almost 57 per cent of gross lending for owner-occupied
housing and summer cottages in the 4th quarter of 2003. Practically all
3
deferred-amortisation loans are financed via adjustable-rate bonds.
1
2
3
2000 saw the introduction of adjustable-rate loans as bond loans based on uncallable variable-rate
annuity bonds with a typical maturity of 4-5 years.
A general discussion of these topics can be found in Anders Møller Christensen and Kristian Kjeldsen,
Adjustable-Rate Mortgages, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2002.
Record lending in 2003 – mortgage-credit lending exceeds half a trillion! (in Danish), the Association
of Danish Mortgage Banks, press release, 27 January 2004.
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Owing to the new loan types, the proportion of adjustable-rate bonds in
the Danish bond market is rising at the cost of conventional callable
mortgage-credit bonds with long maturities. This means that the financial structure of the Danish real-property market now resembles that of
the euro area to a higher degree than previously. In Europe the Danish
mortgage-credit market is only exceeded by the German one in absolute
volume terms. In GDP terms the Danish mortgage-credit market is
among the largest in the world.
The bond market by selected types
The Danish bond market was previously dominated by callable annuity
bonds, whereas the present circulating volume of government and
mortgage-credit bonds primarily comprises callable annuity bonds and
uncallable bullet loans, with an overweight of the latter, cf. Chart 2.
From 1975 until the beginning of the 1980s most government bonds
were issued as fixed-rate serial loans. In 1983 bullet government bonds
were introduced. In the following years serial loans were phased out in
favour of bullet loans, and from 1988 the former ceased to be part of
the central government's on-the-run issues.
Until the mid-1980s the Danish mortgage-credit market was dominated
by fixed-rate annuity loans with long maturities. However, with the
GOVERNMENT SECURITIES AND MORTGAGE-CREDIT BONDS BY SELECTED
LOAN TYPES
Chart 2
Kr. billion
Per cent
2,500
100
2,250
90
2,000
80
1,750
70
1,500
60
1,250
50
1,000
40
750
30
500
20
250
10
0
0
1970
1975
1980
1985
1990
Annuity
Bullet
Percentage callable (right-hand axis)
1995
2000
Serial
Index-linked – mortgage credit
Note:
Estimated nominal values at end-October. "Percentage callable" is estimated on the basis of loan types, excluding index-linked bonds. Index-linked bonds are stated at the indexed value. Government bonds denominated in
foreign exchange have been excluded.
Source: Copenhagen Stock Exchange, Nordea Analytics and Danmarks Nationalbank.
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Chart 3
DOMESTIC GOVERNMENT DEBT BY SECURITY TYPES
Per cent
100
Kr. billion
800
90
750
80
700
70
650
60
600
50
550
40
500
30
450
20
400
10
350
300
0
1986
1988
1990
1992
1994
Fixed-rate bullet government-bond loans
1996
1998
Serial loans
Variable-rate bullet government-bond loans
Treasury notes
Treasury bills
Other
2000
2002
Total domestic government debt (right-hand axis)
Note:
Nominal value at end-December. Foreign-exchange swaps in 2001-02 totalling kr. 21 billion have been excluded.
"Other" comprises e.g. premium bonds. In 1984, 5- and 10-year variable-rate bullet government-bond loans with
quarterly interest adjustment were introduced. Issues of these bonds ceased in 1990, and today all variable-rate
government-bond loans have been redeemed.
Source: Danmarks Nationalbank.
Potato Package of Economic Measures in 1986 mixed loans became
compulsory, leading to issues of serial loans in the mortgage-credit market. In 1993 it once again became possible for mortgage-credit institutes
to provide loans solely based on annuity bonds.
The ratio of callable to uncallable bonds has also changed since 1970.
Owing to the issuance activity in government securities and, more
recently, the emergence of adjustable-rate bonds, callable bonds as a
percentage of the total market for government securities and mortgagecredit bonds has declined significantly in this period, cf. Chart 2.
In Denmark, government bonds are issued in the 5- and 10-year maturity
1
segments, whereas Treasury notes are issued with a maturity of 2 years.
These maturity segments are also the internationally most important
2
ones. These securities, along with Treasury bills , which are issued with
maturities of up to 12 months, make up the central government's onthe-run issues. In line with the government borrowing structure in many
1
2
Since considerable government deficits were envisaged, the sale of Treasury notes was resumed in
1976.
In 1990 zero-coupon Treasury bills were introduced (i.e. the yield is the difference between issue
below par and redemption at par).
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41
other countries, the Danish domestic central-government debt today
practically only comprises fixed-rate bullet loans (government bonds and
Treasury notes) and Treasury bills, cf. Chart 3. The government borrowing structure has thus gradually been simplified.
By building up large liquid series the central government seeks to
1
achieve a liquidity premium and thus lower borrowing costs. The
central-government borrowing strategy helps to make government securities attractive to both domestic and foreign investors.
DEVELOPMENT IN THE TOTAL KRONE DURATION SINCE 1999
A major consideration for bond investors is the interest-rate risk of the
bond portfolio. The interest-rate risk of a bond can be expressed as the
2
krone duration, cf. the Appendix. The value of the krone duration of an
individual bond series depends on the characteristics of the bond, including term to maturity, coupon and amortisation, but also on the
yield curve and the development in the volume of the series. For callable
mortgage-credit bonds the borrower's right of conversion must also be
taken into account. If the callable mortgage-credit bonds are traded at or
above par, the krone duration is typically very low.
The pattern of the total krone duration in the Danish bond market is
affected by the structural change in the composition of the circulating
volume of mortgage-credit bonds, i.e. a higher percentage of adjustable-rate bonds and a lower krone duration for the callable mortgagecredit bonds as a result of the course of interest rates, cf. Chart 4.
In the period 1999-2003 the total krone duration fell from kr. 100
3
billion to kr. 83 billion. In mid-1999 the krone duration for callable mortgage-credit bonds accounted for just over half the total krone duration.
Four years later this percentage had decreased to just over one third. Even
though adjustable-rate bonds constituted almost a third of the circulating
volume of mortgage-credit bonds in 2003, they only contributed 8 per
cent of the total krone duration. Typically these bonds have a maturity of
only 1 year and thus a relatively low krone duration.
A large proportion of the krone duration for the callable mortgage4
credit bonds is related to 30-year issues within the last 10 years. The
1
2
3
4
For a more detailed description, see Danmarks Nationalbank, Danish Government Borrowing and
Debt 2002, 2003.
For a detailed review of bond risks etc. see Danmarks Nationalbank, Financial Management at Danmarks Nationalbank, 2004.
The total krone duration at end-December 2003 was calculated at kr. 88 billion. This development is
primarily attributable to an influx of 30-year mortgage-credit bonds with a coupon of 5 per cent
maturing in 2035.
During the past 10 years, 30-year callable mortgage-credit bonds have been issued with coupons of 5,
6, 7 or 8 per cent. Depending on the time of issue, these securities mature in 2026, 2029, 2032 or
2035.
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TOTAL KRONE DURATION BY BOND TYPES, AND THE 10-YEAR
GOVERNMENT-BOND YIELD
Chart 4
Kr. billion
Per cent
100
7.0
90
6.5
80
6.0
70
5.5
60
5.0
50
4.5
40
4.0
30
3.5
20
3.0
10
2.5
0
2.0
1999
2000
Government securities
2001
2002
Other bonds
Mortgage-credit bonds – callable
2003
Mortgage-credit bonds – adjustable-rate
10-year government-bond yield (right-hand axis)
Note:
The krone duration is stated at end-June. The 10-year government-bond yield is shown on a monthly basis. "Other
bonds" comprise e.g. index-linked bonds issued by mortgage-credit institutes and issues from special institutions,
government-guaranteed entities and private enterprises. The krone duration for index-linked bonds is stated on the
basis of the indexed value.
Source: Nordea Analytics, Danmarks Nationalbank and own calculations.
krone duration for these issues has fallen by just over a third, from kr.
36 billion to kr. 23 billion, and most of the krone duration is now related to 30-year mortgage-credit bonds with a coupon of 5 per cent, cf.
Chart 5.
From mid-1999 to mid-2002 mortgage-credit bonds with a coupon of 6
per cent maturing in 2026 and 2029 contributed most of the total krone
duration. In this period, the extensive waves of conversions – in the form
1
of bond purchases in the market – in these securities led to a significant
reduction in the circulating volume of bonds. This development contributed to the decline in the krone duration for 30-year securities in this
period.
Throughout the period shown most 30-year mortgage-credit bonds
with a coupon of 7 or 8 per cent were traded above par as interest rates
declined (depending on coupon and maturity). This led to extraordinary
redemptions. By mid-2003 this was also the case for 30-year bonds with
a coupon of 6 per cent. As a result, the total krone duration has decreased. On the other hand, recent years' issuance of 5-per-cent bonds
1
Cf. Ulrik Knudsen, Conversions of 30-Year Mortgage-Credit Bonds During the Last 10 Years, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2003.
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THE KRONE DURATION OF 30-YEAR MORTGAGE-CREDIT BONDS BY
COUPON, AND THE 10-YEAR GOVERNMENT-BOND YIELD
Chart 5
Kr. billion
40
Per cent
6.5
35
6.0
30
5.5
25
5.0
20
4.5
15
4.0
10
3.5
5
3.0
0
2.5
2.0
-5
1999
2000
2002
2001
2003
8 per cent
7 per cent
6 per cent
5 per cent
10-year government-bond yield (right-hand axis)
Note:
The krone duration is stated at end-June. The 10-year government-bond yield is shown on a monthly basis. A
mortgage-credit model is used to determine the krone duration. Consequently the determination of the krone
duration entails model uncertainty since the calculations are dependent on assumptions of e.g. the borrower's
conversion behaviour. The value of the krone duration may therefore vary from model to model, depending on
the model assumptions.
Source: Nordea Analytics, Danmarks Nationalbank and own calculations.
1
maturing in 2035 has increased the krone duration. When a borrower
converts high-yield callable loans into callable loans with a lower yield,
this has a positive effect on the krone duration. However, if the new
loans are adjustable-rate loans, the impact on the krone duration is
limited.
The total krone duration is sensitive to changes in interest rates. For
example, an increase in the level of interest rates by 0.5-1.0 percentage
points would mean that 30-year mortgage-credit bonds with a coupon
of 6 per cent were traded below par, depending on their maturity. This
would reduce the risk of conversion and thus increase the krone duration.
1
In the period shown the circulating volume of 30-year bonds increased by almost kr. 62 billion to kr.
627 billion. This increase comprised a reduction by kr. 128 billion in 30-year mortgage-credit bonds
with a coupon of 6 per cent or more. On the other hand, the volume of 30-year bonds with a coupon
of 5 per cent increased by kr. 190 billion, including growth of kr. 166 billion in bonds with a coupon
of 5 per cent maturing in 2035 since the autumn of 2002.
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APPENDIX
Bond-market concepts
Amortisation:
Annuity loan: Constant payments at regular intervals (higher instalments
and lower interest payments over time).
Serial loan: Constant instalments at regular intervals (lower payments
over time).
Bullet loan: Only interest is paid during the term of the loan - the principal falls due on the maturity date.
Mixed loans: Typically 60 per cent annuity loan and 40 per cent serial
loan.
Callable: A loan is callable when it can be redeemed prematurely at par,
in addition to purchases in the market of the callable bonds on which
the mortgage-credit loan is based.
Uncallable: A loan is uncallable when it can only be redeemed prematurely by purchasing the bonds on which the mortgage-credit loan is
based.
Bond loan: The borrower's principal is equal to the nominal value of the
bonds on which the loan is based. The borrower's proceeds thus depend
on the market value of the bonds at issue.
Cash loan: The borrower's principal is equal to the market value of the
bonds issued. The capital loss to the mortgage-credit institute when
selling the bonds is included in the cash-loan interest and is thus taxdeductible for private borrowers. In connection with premature redemption the borrower is tax liable for any capital gain.
Interest:
Fixed-rate loan: The rate of interest is unchanged throughout the term
of the loan.
Adjustable-rate loan: Current adaptation of the rate of interest at fixed
intervals.
Refinancing: The outstanding debt is fully or partially replaced by sale of
new bonds.
Index-linked loan: The principal and the outstanding debt, and thus the
payments, are regularly adjusted in accordance with the development in
an agreed price index. Granted as a cash loan.
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Nominal loan: Generic term for loans that are not index-linked. This is by
far the most common – and the traditional – type of loan.
Krone duration: Expresses how much the market value of a bond holding marginally changes in kroner at a 1-percentage-point change in the
yield curve.
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47
The US Current-Account Deficit and the Dollar
Niels C. Beier, Economics
The US current-account deficit is around 5 per cent of GDP and has been
increasing, cf. Chart 1. A deficit of that size usually triggers a weakening
of the currency and lower growth. The USA is an economic superpower
and lower US growth as well as a weaker dollar will automatically have
global effects – especially if the dollar falls abruptly, creating turbulence
in the global financial markets. Against this background the US currentaccount deficit has been subject to numerous analyses (e.g. Bergsten and
Williamson, 2003; BIS, 2003; Greenspan, 2003; Mann, 1999, 2002;
Obstfeld and Rogoff, 2000).
This article provides a general overview of the developments in the US
current account and the dollar in recent years. First, the pattern from
the mid-1990s until today is outlined in the light of the macroeconomic
development. The underlying capital flows are then analysed and finally,
an account is given of the future sustainability of the deficit and possible
adjustments.
Chart 1
THE US CURRENT ACCOUNT 1995-2003
Per cent of GDP
1
0
-1
-2
-3
-4
-5
-6
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Current account as a percentage of GDP
Note: The 2003 figure represents the OECD autumn 2003 estimate.
Source: OECD, Economic Outlook 74.
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Some of the article's conclusions are: the increasing current-account
deficit during the second half of the 1990s was driven by private-sector
investments and savings in response to the "new economy". The deficit
in 2001-03 was generated by the public sector's savings deficit and by
the households' continued low propensity to save. It reflects the expansionary economic policy following the reversal of the stock prices and
the economy in 2000-01. The present combination of a budget deficit
and the households' low propensity to save makes the current-account
deficit less sustainable than previously, and the weakening of the dollar
since 2002 should be seen in that light.
THE CURRENT ACCOUNT, THE DOLLAR AND THE MACROECONOMY
The current account
A current-account deficit is not bad by definition or necessarily undesirable. On the contrary, the deficit may reflect a country's borrowing
abroad to finance productive investments for the benefit of future out1
put. The US current-account deficit in the second half of the 1990s can
be interpreted as a deficit of this type. The US economy was affected by
a favourable productivity shock (the "new economy"), which inter alia
resulted in increased investments in order to benefit from new technology. The result was a number of golden years of high growth in output,
2
investments and consumption as well as rapidly rising stock prices.
In 2000 the economy started to slow down, and stock prices declined
sharply. Since then the private sector – seen as a whole – has consolidated while economic policy has been expansionary in order to support
the economy. The monetary-policy interest rate was lowered from 6.5
per cent in 2001 to 1 per cent in 2003. Fiscal policy has been eased considerably through tax cuts adopted in both 2001 and 2003. As a result,
the federal budget surplus of approximately 2½ per cent of GDP in 2000
3
has been transformed to a deficit of 3½ per cent in 2003.
The counterpart of the current-account deficit has thus shifted from a
private to a public savings deficit. This is illustrated in Chart 2 which
shows the current-account deficit's counterparts on the private and public savings balances. It also appears that the present situation is somewhat reminiscent of the 1980s when the situation with concurrent external and government deficits was termed the Twin Deficits.
1
2
3
See Pedersen (2003) for a general introduction to the balance of payments and the specific development in Denmark. See also Sørensen (1999) as well as IMF (2002) and Vastrup (1999) for different
views on the importance of the balance of payments as a policy objective.
The rapidly rising stock prices and the high investment level indicate that the latter part of the
period may have been characterised by overoptimistic expectations of the economy and overinvestment, cf. the subsequent falls in stock prices and low capacity utilisation.
The figures refer to the fiscal years of 2000 and 2003, cf. the Congressional Budget Office.
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Chart 2
US FINANCIAL BALANCES 1980-2003
Per cent of GDP
6
4
2
0
-2
-4
-6
-8
1980
1982
1984
1986
Public svaings balance
1988
1990
1992
1994
1996
1998
2000
2002
Private savings balance
Current account as a percentage of GDP
Note:
The public savings balance comprises the federal savings balance as well as local authorities' savings balance. The
observations for 2003 represent the OECD autumn 2003 estimate.
Source: OECD, Economic Outlook 74.
The term twin deficits is, however, a simplification of the present situation, as the overall consolidation of the private sector conceals sectoral
differences. The business enterprises have improved their savings balance the most, while the households' savings are still at a low level. The
ratio of households' savings to disposable income is by and large unchanged compared to 1999. The difference between the behaviour of
business enterprises and households was obvious in the two relatively
slack years of 2001 and 2002 when private investments declined while
private consumption increased, strongly stimulated by the falling interest rates and the considerable personal-tax cuts.
The dollar
The dollar strengthened in step with the favourable economic development at the end of the 1990s, cf. Chart 3 which shows the real effective
exchange rate. The dollar has weakened since the beginning of 2002,
but has not yet reached the level of the mid-1990s. The question is: why
has the dollar run this course?
Exchange rates are notoriously difficult to explain and predict and
generally show significant and protracted fluctuations (e.g. Dornbusch,
1976; Meese and Rogoff, 1983; Rogoff, 1996). The exchange rate is determined by the expected future return in different currencies, typically
with the expected real-economic development and interest-rate differ-
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CURRENT ACCOUNTBALANCE OF PAYMENTS AND REAL DOLLAR RATE
Per cent of GDP
1
Chart 3
Index, January 1980 = 100
150
0
140
-1
130
-2
120
-3
110
-4
100
-5
90
-6
1980
80
1985
Current account
1990
1995
Real effective dollar rate (right-hand axis)
2000
Note:
The real effective dollar rate is the Federal Reserve's broad measure of the real effective exchange rate, i.e. a
trade-weighted average of a large number of bilateral exchange rates adjusted for differences in national price
developments. The latest observation for the real dollar rate is January 2004.
Source: EcoWin and OECD, Economic Outlook 74.
entials as the dominating factors. However, any exchange-rate development can be interpreted in different ways (Bacchetta and Wincoop,
2004). One possible view of the dollar's pattern since the mid-1990s uses
the macroeconomic developments during the period as its pivotal point.
Considering the positive economic growth and the "new economy",
the strengthening of the dollar was foreseeable. The favourable investment opportunities in the USA naturally required foreign capital, the
dollar strengthened and the balance of payments deteriorated. The
strengthening of the dollar occurred in two stages, from 1996 to the
1
beginning of 1998 and then again in the period 2000-01, cf. Chart 3.
In that light, the weakening of the dollar from the beginning of 2002
until today may be related to the favourable investment opportunities
being exhausted and to concerns as to the sustainability of the currentaccount deficit. The shift from a private savings deficit with a high level
of investments to a public savings deficit, which can be attributed partly
to increased security and defence financing as well as tax cuts ceteris
paribus makes the present deficit less sustainable.
1
Thus, the dollar also strengthened in 2001 when the economy was in recession, investments and
stock prices fell and the Federal Reserve lowered the interest rate drastically during the year. The
development in 2001 only illustrates the point that exchange rates are not always in accordance with
all explanatory elements at the same time, and that the precise timing of exchange-rate changes is
extremely difficult to predict.
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Chart 4
CAPITAL INFLOWS TO THE USA 1997-2003
Billion dollars
700
600
500
400
300
200
100
0
-100
1997
Total
1998
1999
Public
2000
2001
2002
2003
Private
Note: Total of four quarters. Net capital inflows. The latest observation is the 3rd quarter of 2003.
Source: Bureau of Economic Analysis and US Treasury.
FINANCING OF THE CURRENT ACCOUNT AND THE DOLLAR
The increasing current-account deficit from the mid-1990s has extensively been financed by higher private capital inflows. Recently the
inflow of private capital has stagnated, however, whereas public capital
1
inflows have risen, cf. Chart 4. This is due to foreign central banks'
interventions to prevent their currencies from strengthening vis-à-vis the
dollar. Federal Reserve (2003) substantiates this by pointing out that in
2002 public capital inflows were largest in the 2nd and 4th quarters
exactly when the pressure on the dollar was most intense.
A closer look at the private capital flows reveals divergence at the start
of the 2000s compared to the second half of the 1990s.
First and foremost, the composition of private capital inflows has
changed. From 1997 to 2000 there was a large influx of private funds to
Corporate America, i.e. stocks, corporate bonds and direct investments,
but from 2000-01 the relative significance of these assets has declined.
For example, foreign direct investments in the USA decreased by more
than 200 billion dollars from the 1st quarter of 2001 to the 3rd quarter
2
of 2003. The private capital inflows can now to a larger extent be attributed to private investors' purchases of US government bonds.
1
2
The public capital flows include primarily foreign central banks' purchases and sales of US assets –
typically government bonds.
Sum of four quarters.
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DISTRIBUTION BY COUNTRY OF PRIVATE CAPITAL INFLOWS TO THE USA
Chart 5
Billion dollars
500
400
300
200
100
0
-100
1997
Euro area
1998
1999
UK
2000
Japan
2001
2002
2003
Other
Note:
The Chart illustrates inflows of direct investments and portfolio investments. Net capital inflows. Sum of four
quarters. The latest observation is the 3rd quarter of 2003.
Source: Bureau of Economic Analysis and US Treasury.
Secondly, the flat course of total private capital inflows in the period
1
2001-03 reflects diverging individual developments. Foreign purchases
of US securities and direct investments in the USA have fallen, but this
has been offset by a decrease in US purchases of foreign securities and
direct investments in other countries.
Finally, the composition of countries has changed, cf. Chart 5. In the
period 1997-2000 the euro area accounted for a significant part of the
USA's private capital imports, but in recent years, the private sources of
finance have come from especially the UK and Japan while private net
capital flows from the euro area to the USA have ceased.
Overall, it may be concluded that in the second half of the 1990s the
deteriorating current-account deficit was increasingly financed by acquisitions of US business enterprises, corporate bonds or stocks, whereas
the present deficit is to a larger extent financed by foreign purchases of
government securities – especially purchases by Asian central banks.
The current account and the dollar: a financing view
Foreign investors' willingness to finance the US current-account deficit
plays an important role in terms of the dollar rate and the size of the
current-account deficit. If foreign investors do not wish to acquire US
1
Or more precisely net purchases – the difference between purchases and sales.
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GLOBAL FOREIGN-EXCHANGE RESERVES DISTRIBUTED BY COUNTRY AND
REGION
Chart 6
Billion SDR
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1997
North America
1998
1999
Europe
2000
Japan
2001
Non-Japan Asia
2002
Rest
Note: The reserves are compiled in SDR (Special Drawing Rights) and are exclusive of gold.
Source: IMF, International Financial Statistics.
securities and other US assets at a given exchange rate, the dollar rate
will recede and a weaker dollar will – ceteris paribus – improve the
1
current account and vice versa.
During the boom in the second half of the 1990s demand for US business enterprises, stocks and corporate bonds among private investors
was substantial. The dollar strengthened. The pattern from the peak of
the boom until now shows that foreign private investors' demand for US
assets has declined. One possible explanation is that private investors
have become concerned about the sustainability of the current-account
deficit in the light of the concurrent government deficit. A reversal of a
current-account deficit will typically involve a weakening of the currency, cf. below, which will – ceteris paribus – make it less attractive for
foreigners to invest in the USA since the value of the investments decreases in the investors' currency. The dollar has weakened concurrently
with the decline in private foreign capital flows.
The dollar's general tendency to weaken has caused a number of
Asian countries to intervene in the foreign-exchange markets to prevent
their currencies from strengthening vis-à-vis the dollar. This applies not
only to China that actively pursues a fixed-exchange-rate policy against
the USA, but also to other countries with more flexible exchange-rate
1
The current account is improved via enhanced competiveness as a result of the weakening of the
dollar. The improvement typically occurs with a certain lag (J-curve).
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THE COUNTERPARTS OF THE US CURRENT-ACCOUNT DEFICIT
Box 1
In theory, the global current account sum is zero, i.e. the US deficit is offset by other
countries' surpluses. However, in practice a significant global deviation exists, as the
sum of deficits exceeds the sum of surpluses. In 2001 the deviation was around 150
billion dollars. This deviation can be attributed to several factors (see IMF, 2002),
probably including the fact that the tax systems give an incentive to capture all allowances in income. The global deviation generates uncertainty as to the actual size of
the US current-account deficit which is nevertheless large.
The Chart illustrates the US current account and some of its important counterparts,
including the global deviation. As can be seen, the Japanese and euro area surpluses
more than offset the US deficit in the mid-1990s. The Japanese and European surpluses have been fairly stable thus the present large US deficit is offset by other countries' increased surpluses. The Chart shows that Emerging Asia has seen a growing
surplus from 1996 to 2002 and is increasingly a counterpart of the US deficit. The
largest country in the category Emerging Asia is China which overall has a small current-account surplus. On the other hand, China has a large surplus if trade with the
USA is viewed in isolation.
CURRENT ACCOUNTS FOR SELECTED REGIONS AND COUNTRIES, 1980-2002
Billion dollars
200
100
0
-100
-200
-300
-400
-500
-600
1980
1982
USA
1984
1986
Euro area
1988
Japan
1990
1992
1994
Emerging Asia
1996
1998
2000
2002
Global deviation
Note:
In the Chart Emerging Asia comprises the Philippines, India, Indonesia, China, Malaysia, Singapore, South
Korea and Thailand. The global deviation is (minus) the global balance of payments as stated by the IMF.
The latest observation for the global deviation is 2001.
Source: IMF, International Financial Statistics and OECD, Economic Outlook 72 and 74.
regimes. Japan intervened strongly in 2002 and 2003. The Asian interventions can be illustrated by the significant increases in the countries'
1
foreign-exchange reserves in recent years, cf. Chart 6. The countries
typically have a trade surplus vis-à-vis the USA and overall they have a
current-account surplus, cf. Box 1.
1
IMF (2003) argues that several Asian countries have built up larger reserves than warranted by the
economic fundamentals.
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Chart 7
DOLLAR RATES, SELECTED COUNTRIES
Index, January 2002 = 100
105
100
95
90
85
80
75
70
65
Jan
2002
Apr
Jul
Oct
Effective dollar rate
Jan
2003
Japan
Apr
Jul
Oct
Euro area
UK
Apr
Oct
Jan
2004
Index, January 2002 = 100
105
100
95
90
85
80
75
70
65
Jan
2002
Apr
Jul
Oct
Effective dollar rate
Jan
2003
Canada
China
Jul
Jan
2004
South Korea
Index, January 2002 = 100
105
100
95
90
85
80
75
70
65
Jan
2002
Apr
Jul
Oct
Effective dollar rate
Jan
2003
Thailand
Apr
Taiwan
Jul
Oct
Jan
2004
Hong Kong
Note:
Nominal exchange rates. The effective dollar rate is the nominal
effective dollar rate. A decline in the Chart reflects a weakening
of the dollar. The latest observation is January 2004.
Source: EcoWin.
In general the extent
and duration of the effects of interventions in
the
foreign-exchange
markets are an open
question. However, overall the Asian currencies
have indeed strengthened less than the flexible currencies, e.g. the
euro, the pound sterling
and the Canadian dollar,
vis-à-vis the dollar, cf.
Chart 7. The strengthening of the pound sterling, the Canadian dollar
and the Japanese yen
has been on the same
scale, while the euro has
accounted for the most
significant strengthening.
Table 1 indicates different countries' weights in
the trade-weighted effective exchange rate of
the dollar. The total
weight of the Asian currencies is not insignificant. A change in the
countries'
foreign-exchange policies may thus
impact considerably on
the effective dollar rate.
THE CURRENT ACCOUNT AND THE DOLLAR IN FUTURE
History shows that on average countries with an external deficit of 4-5
per cent of GDP have their current accounts restored (BIS, 2003; Freund,
2000; IMF, 2002). However, some countries have a larger deficit prior to
the adjustment, and naturally the "threshold value" for the USA is unknown. In any case the current-account deficit means that the US net
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WEIGHTS IN THE EFFECTIVE DOLLAR RATE IN 2004
Country
Table 1
Weight (per cent)
Euro area ..................................................................
Canada .....................................................................
Japan ........................................................................
Mexico ......................................................................
China ........................................................................
UK..............................................................................
South Korea .............................................................
Taiwan ......................................................................
Malaysia ...................................................................
Singapore .................................................................
Hong Kong ...............................................................
Brazil .........................................................................
Thailand ...................................................................
Switzerland ..............................................................
Australia ...................................................................
19
17
11
11
10
5
4
3
2
2
2
2
1
1
1
Note: The weights are rounded. Only the 15 countries and regions with the largest weights have been included.
Source: Federal Reserve.
external debt increases, cf. Chart 8. An increasing proportion of the US
output must thus be "handed over" to abroad by way of interest and
dividend. Due to the low level of interest rates this consequence has not
been clearly felt until now, but the debt cannot rise infinitely.
On the other hand, the USA enjoys special status due to its size and
the dollar's role as a global reserve currency. Considering the role of the
dollar there will always be demand for US securities among countries
and investors. Another reason is that the US financial markets and the
US economy are the largest in the world and a diversified portfolio
should – ceteris paribus – include an appropriate amount of US assets.
Furthermore, non-residents have historically achieved lower returns on
their investments in the USA than residents have achieved on investments abroad. This appears from the fact that even though the USA's
net international investment position had been negative for some time,
it was not until 2002 that the USA's receipts of interest and dividend
were lower than its payments of interest and dividend. Also, a large part
of the US debt is issued in dollars (Mann, 2002), whereby a weakening of
the dollar entails a capital loss for foreign investors, not the other way
round. All these factors imply a higher "threshold value" and better
sustainability of a given deficit.
The present deficit has become less sustainable as it reflects a low savings level rather than a high investment level. Contrary to low savings
increased investments imply higher output in the future and thus more
future resources to service the debt – i.e. better sustainability of a given
deficit.
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Chart 8
THE USA's NET FOREIGN ASSETS 1980-2002
Per cent of GDP
15
10
5
0
-5
-10
-15
-20
-25
-30
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Net assets as a percentage of GDP
Note: Net international investment position.
Source: IMF, International Financial Statistics and OECD, Economic Outlook 74.
How will an adjustment take place?
According to history (BIS, 2003; Freund, 2000; IMF, 2002) a currentaccount deficit is adjusted via two channels: a weakening of the cur1
rency and lower economic growth. If the dollar's decline in the last few
years is interpreted as the beginning of an adjustment of the US currentaccount deficit, it is remarkable that in the same period the USA has
seen and is still seeing strong growth compared to e.g. the euro area
and Japan. This should be viewed in the context of the expansionary
economic policy that has buoyed up the economy.
An adjustment of the US current-account deficit via lower future
growth in the USA is plausible as both the public sector and the households need to increase their savings. Primarily, consolidation of public
finances seems to be necessary in the medium term, i.e. tighter fiscal
policy in the future. Significant government deficits and indebtedness
2
are envisaged during the next decade , if the fiscal policy adopted thus
far is implemented without changes. Like many other countries the USA
is also faced with increasing pressure on the expenditure side in the
coming years as the large post-war generations retire from the labour
1
2
Freund's (2000) analysis shows that lower growth and a weakening of the currency typically occur
over a period of 3-4 years around the time the current-account deficit reaches its peak.
The Congressional Budget Office's most recent estimate up to 2014 for the federal finances dates
from January 2004 and is available at www.cbo.gov.
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58
1
market. The households' savings ratio has reached a historical low and
2
indebtedness has shown an increasing trend. The boost in consumption
in the second half of the 1990s can be attributed to expectations of
future income increases and wealth gains in relation to the "new economy", whereas in recent years consumption has to a large extent been
stimulated by economic policy, especially fiscal policy. The households
cannot accumulate debt infinitely either.
In addition, asymmetrical trade elasticity between the USA and the
rest of the world means that relative growth in the USA must decline if
the current-account deficit is to be reversed. Empirical studies (cf. Mann,
1999) show that following a 1-per-cent increase in income both in the
USA and the rest of the world the US current account will – ceteris
paribus – deteriorate. US imports will increase more rapidly than imports
in the rest of the world. This asymmetry is not explained in full but
supports the view that an adjustment will imply lower relative US
growth. Chart 9 illustrates that exports must grow significantly more
than imports in order to close the gap between the two series. A weakening of the dollar alone is probably not enough.
What does an adjustment entail for the rest of the world?
Basically an adjustment of the US deficit is desirable if the deficit is unsustainable. A significant uncertainty is whether the adjustment is gradual or abrupt.
An abrupt adjustment, e.g. through a sudden and very strong weakening of the dollar, may lead to turbulence in the global financial markets.
This turbulence may spread to the rest of the world economy, and this is
one of the reasons for the strong focus on the US current account. Finally, there may be a tendency for the financial markets to overreact, so
that a dollar movement becomes unnecessarily strong and distorts the
adjustment. The dollar has declined significantly since its peak at the
start of 2002, but the weakening has not led to turbulence, as it has
been gradual. This was also the case for the weakening of the dollar in
the 1980s, cf. Chart 3.
Even if a weakening of the dollar is gradual it will still have an effect.
In the countries with strengthened currencies the competitiveness of the
business enterprises will deteriorate, but the countries will at the same
time experience improved terms of trade, contributing to higher real
incomes. In global economic models the net effect on GDP growth is
1
2
For an overview of the problems of the US public finances reference is made to the contributions in
Mühleisen and Towe (2004) and the references therein.
The question is, of course, what is the "equilibrium savings ratio"? In general, the savings ratio has
been declining in the USA since the mid-1980s.
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Chart 9
US EXPORTS AND IMPORTS 1990-2002
Billion dollars
1,600
1,400
1,200
1,000
800
600
400
200
0
1990
1991
1992
Export
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Imports
Note: Goods and services.
Source: Bureau of Economic Analysis.
typically negative. On the other hand, US goods become cheaper abroad
– US competitiveness improves – and this will have a positive impact on
the current account in the USA.
If an adjustment takes place via lower growth in the US economy,
global growth can only be maintained if activity increases in other areas.
The adjustment of the US deficit in the 1980s occurred at a time of
strong demand in Japan and Germany. In the present situation growth
in these two countries has been low for a number of years – although
Japan saw positive trends in 2003. Thus, reforms to stimulate private
demand in the two countries are called for – not only from a domestic
perspective but also from a global perspective in relation to an adjustment of the USA's external deficit.
Another aspect is the distribution of the weakening of the dollar. Thus
far it has been most significant vis-à-vis the euro. If the dollar continues
to weaken and the Asian countries continue to intervene the flexible
currencies will carry the largest "burden". In this connection it should be
borne in mind that the flexible currencies only carry the burden now
because they reaped the "gain" during the period when the dollar
strengthened. In that period the countries that followed the dollar most
closely carried the burden. The problem seems to arise precisely because
domestic demand in e.g. the euro area is as low as it is. In addition, several studies indicate that the euro is presently close to its equilibrium
exchange rate (see ECB, 2002 for an overview).
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CONCLUSION
The present current-account deficit in the USA reflects low savings, and
it is doubtful whether the deficit is sustainable. Consolidation is required
both in the public sector and in the households. The gradual weakening
of the dollar in recent years that has coincided with decreasing private
foreign capital inflows to the USA can be seen as the start of an adjustment. Viewed in isolation, a declining dollar will improve the US current
account but in a more forward-looking perspective, lower US growth for
a while seems to be a precondition for reversing the deficit.
In that light the question is whether it would have been more expedient to adjust demand in the USA at an earlier stage but to a lesser extent. It has been argued that the Federal Reserve ought to have reacted
1
earlier based on the soaring stock prices (e.g. Cecchetti, 2002) that contributed to the imbalances. The Federal Reserve rejects the criticism
(Greenspan, 2004) and finds that no other response to the stock-price
development was possible based on two arguments. It was impossible to
determine firstly whether the stock-price rises were unfounded (bubble),
and secondly the required increase in interest rates should have been
excessively large and would have harmed the economy more than the
result of declining stock prices at a later stage. The Federal Reserve finds
that the major problem in relation to the current-account situation is
that – combined with weak employment growth – it gives rise to opposition against free trade due to short-term considerations to protect US
jobs (Greenspan, 2003).
1
The problem can also be seen as a question of how monetary policy should respond to a productivity
shock.
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61
LITERATURE
Bacchetta, Philippe and Eric van Wincoop, 2004. A Scapegoat Model of
Exchange Rate Fluctuations. National Bureau of Economic Research,
Working Paper 10245.
Bergsten, C. Fred and John Williamson (editors), 2003. Dollar Overvaluation and the World Economy. Washington D.C.: Institute for International Economics.
BIS, 2003. 73rd Annual Report.
Cecchetti, Stephen G., 2002. Central Bankers and Asset Price Misalignments. Financial Times, 9 May.
Dornbusch, Rudiger, 1976. Expectations and Exchange Rate Dynamics.
Journal of Political Economy 84, pp.1161-1176.
ECB, 2002. Economic Fundamentals and the Exchange Rate of the Euro.
Monthly Bulletin, January, pp. 41-54.
Federal Reserve, 2003. U.S. International Transactions in 2002. Federal
Reserve Bulletin, May, pp. 191-203.
Freund, Caroline L., 2000. Current Account Adjustments in Industrialized
Countries. Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 692.
Greenspan, Alan, 2003. Current Account. Speech at the 21st Annual
Monetary Conference, Washington D.C., 20 November.
Greenspan, Alan, 2004. Risks and Uncertainty in Monetary Policy. Speech
at the American Economic Association's meeting on 3 January, San Diego.
IMF, 2002. Essays on Trade and Finance. World Economic Outlook. Chapter II, September.
IMF, 2003. Three Current Policy Issues in Developing Countries. World
Economic Outlook. Chapter II, September.
Mann, Catherine L., 1999. Is the U.S. Trade Deficit Sustainable?
Washington D.C.: Institute for International Economics.
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62
Mann, Catherine L., 2002. Perspectives on the U.S. Current Account
Deficit and Sustainability. Journal of Economic Perspectives, Volume 16
Number 3, pp. 131-152.
Meese, Richard A. and Kenneth Rogoff, 1983. Empirical Exchange Rate
Models of the Seventies: Do They Fit Out of Sample? Journal of International Economics 14, pp. 3-24.
Mühleisen, Martin and Christopher Towe (editors), 2004. U.S. Fiscal
Policies and Priorities for Long-Run Sustainability. IMF, Occasional Paper
227.
Obstfeld, Maurice and Kenneth S. Rogoff, 2000. Perspectives on OECD
Economic Integration: Implications for U.S. Current Account Adjustment.
In Global Economic Integration: Opportunities and Challenges. A Symposium Sponsored by The Federal Reserve Bank of Kansas City.
Pedersen, Erik H., 2003. The Balance of Payments – from Sustained
Deficit to Sound Surplus. Danmarks Nationalbank, Monetary Review,
2nd Quarter, pp. 25-44.
Rogoff, Kenneth S., 1996. The Purchasing Power Parity Puzzle. Journal of
Economic Literature 34, pp. 647-688.
Sørensen, Peter B., 1999. The Current-Account Target – a Commentary,
(in Danish) Nationaløkonomisk Tidsskrift 137, pp. 360-387.
Vastrup, Claus, 1999. Does the Current Account Present a Problem? (in
Danish). Published in Lotte Langhoff-Roos (editor), Socialøkonomisk
Debat Gennem 25 År. Jurist- og Økonomforbundets Forlag.
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63
Quarterly Financial Accounts for Denmark
Jan Overgaard Olesen and Jens Jakob Svanholt, Statistics
INTRODUCTION
In recent years Danmarks Nationalbank has extended its financial statistics for Denmark, inter alia on the basis of statistical requirements from
the European Central Bank, ECB. In April 2004 Danmarks Nationalbank
will therefore publish its first quarterly financial accounts for Denmark,
and subsequently these statistics will be published regularly with a time
lag of 15 weeks.
Financial accounts include a financial balance sheet and a statement of
the financial flows for all main sectors of the economy. They are not
statistics in the traditional sense, but derived statistics generated by
processing and compiling existing primary sources. Quarterly financial
accounts have not previously been published for Denmark, but Statistics
Denmark has compiled annual financial accounts since 2001. The purpose of Danmarks Nationalbank's statistics is to illustrate the development in financial wealth on a quarterly basis with the shortest possible
time lag. From the outset, the statistics will include information on the
financial balance sheets, while financial flows are expected to be incorporated during 2005.
Quarterly financial accounts are well-known in other countries. The
statistics derive from the USA, where quarterly financial accounts have
1
been prepared according to the "Flow-of-Funds" principle since 1959.
Quarterly financial accounts are also published in e.g. the UK, Norway
and Sweden, with the two latter countries focusing primarily on household information.
This article initially describes the background to the compilation of
financial accounts and provides an overview of the contents of the statistics. Subsequently a preliminary extract of the quarterly financial
accounts for Denmark is presented in the form of the financial balance
sheets for households and non-financial corporations. Finally, some of
the possible applications are outlined, based on e.g. the ECB's use of
financial accounts.
1
Financial accounts prepared according to the "Flow-of-Funds" principle include information on the
counterparties to all financial transactions.
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BACKGROUND
With the establishment of Economic and Monetary Union, significant
extension of the financial statistics was initiated at the European level,
inter alia with a view to improving the basis for planning the single
1
monetary policy. Among the new statistics are quarterly financial accounts for the euro area (Monetary Union Financial Accounts, or MUFA),
which have been compiled and published by the ECB since May 2001.
The statistics currently cover the most important financial assets and
liabilities for selected main sectors. In the longer term the ECB intends to
extend the statistics to a full set of financial accounts. MUFA are published in a separate press release 4½ months after the end of a quarter
and are regularly included in the description of monetary and financial
2
development in the euro area. The statistics are compiled on the basis
of available primary statistics for the euro area (e.g. the ECB's balancesheet and flow statistics for monetary financial institutions), as well as
supplementary national information reported to the ECB by the individual member states on a quarterly basis. The latter comprises e.g.
information on the households' pension savings and selected sectors'
3
securities holdings.
The project to compile quarterly financial accounts for Denmark is
based on the ECB's initiatives for the euro area member states since it is
Danmarks Nationalbank's objective that the Danish financial statistics
should be in line with international requirements and standards. Quarterly financial accounts also have a number of applications which make
the statistics interesting in an economic-policy context, cf. the section on
applications.
Financial accounts for Denmark are the joint responsibility of Danmarks Nationalbank and Statistics Denmark. Basically, Statistics Denmark
is responsible for preparing annual financial accounts, while Danmarks
4
Nationalbank is responsible for the quarterly financial accounts. In
specific subareas this pattern is, however, deviated from if practical considerations such as data availability justify it. This is the case for general
government (where Statistics Denmark also prepares the quarterly
1
2
3
4
Cf. ECB (2000), which outlines the ECB's present and planned future requirements of statistical coverage.
MUFA are published as Financing and Financial Investment in the Euro Area, and are also included in
the statistics appendix in the ECB's Monthly Bulletin. For an introduction to the statistics, see ECB
(2001).
The ECB's need for supplementary national information was formalised in 2002, cf. the Guideline of
the European Central Bank of 21 November 2002 on the statistical reporting requirements of the
European Central Bank in the field of quarterly financial accounts (ECB/2002/7).
The distribution of responsibilities between Danmarks Nationalbank and Statistics Denmark reflects
the international distribution where the ECB compiles quarterly financial accounts for the euro area,
while Eurostat (the Statistical Office of the European Communities) is responsible for the annual
financial accounts.
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accounts). In the same way, Danmarks Nationalbank is responsible for
compiling information for the annual financial accounts for the rest
of the world, which are then processed and published by Statistics
Denmark.
Since 2001, Statistics Denmark has published annual financial ac1
counts with a time lag of 13 months. With Danmarks Nationalbank's
releases from April, quarterly financial accounts will also be available
in future, albeit only for the financial balance sheets in the first instance. The two sets of statistics basically serve different purposes in
that the primary purpose of the annual accounts is to provide a relatively detailed picture of the financial structures in the economy, while
the quarterly accounts are short-term statistics to illustrate the development in the financial conditions with the shortest possible time lag.
The quarterly accounts can thus be used for ongoing analyses of e.g.
economic prospects and issues relating to financial stability, cf. the
application section. There will be numerical discrepancies between the
quarterly and annual statistics, partly as a result of the use of different
primary statistics or calculation methods. Furthermore, the frequency
of revision varies. Revisions of the primary statistics are incorporated in
the quarterly financial accounts on a quarterly basis, but in the annual
accounts on an annual basis. For this reason alone the two sets of figures can be expected to differ. It is not possible to say which statistics
generally give the truest picture. The differences can thus been seen as
an expression of the uncertainty associated with compiling financial
accounts on the basis of incomplete statistical coverage. Statistics
Denmark and Danmarks Nationalbank are working together to ensure
that the need for and possibilities of harmonising the statistics are considered on an ongoing basis.
CONTENTS OF FINANCIAL ACCOUNTS
Financial accounts are part of the national accounts and comply with the
guidelines of the European System of National Accounts (ESA 1995). The
statistics are compiled for a number of different sectors that together
cover the whole economy, including households and non-financial cor2
porations .
For each sector, the financial accounts include a financial balance
sheet showing the holdings of financial assets and liabilities. As a main
1
2
Cf. Statistics Denmark (2001) for the first release. Statistics Denmark has published quarterly financial
accounts for general government since 2002, cf. Statistics Denmark (2002a). The statistics from Statistics Denmark include both financial balance sheets and financial flows.
Non-financial corporations comprise e.g. manufacturing and service enterprises. The sectors are
described in Appendix 1.
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rule, all holdings are stated at market value. In corporate accounts, assets and liabilities balance. However, this is not the case for financial
accounts since they only include information on the financial part of
1
the balance sheet. The value of non-financial assets such as housing,
vehicles and the enterprises' capital stock is thus omitted by definition.
The difference between the holdings of financial assets and liabilities
indicates the sector's net financial assets, which are included as part of
2
the sector's total net worth.
In addition to the financial balance sheets, the financial accounts include statements of financial flows comprising transactions and other
changes (including revaluations). The information on the financial flows
illustrates the degree to which changes in the balance sheet are attributable to e.g. trading in a financial asset (a transaction) or changes in
the price of an asset (revaluation). The flows will not initially be included
in the quarterly financial accounts for Denmark published by Danmarks
Nationalbank, but are expected to be added within the next year.
The financial assets and liabilities are split into a number of main instrument groups:
• Monetary gold and special drawing rights
• Currency and deposits
• Securities other than shares
• Loans
• Shares and other equity
• Insurance technical reserves
• Other accounts receivable/payable
The financial instruments are classified according to type or characteristics. This makes it possible to identify each sector's financial risk or
exposure to e.g. the stock or bond market. The above groups are subdivided, e.g. by degree of liquidity. This can be relevant in connection
3
with monetary analysis.
For compilation of quarterly financial accounts a wide range of primary statistics are used, comprising both direct and indirect sources. The
direct sources are used for compiling financial accounts for a specific
sector and include e.g. Danmarks Nationalbank's International Investment Position (IIP) statistics, statistics on the balance sheets and flows of
the MFI sector, and Statistics Denmark's quarterly financial accounts for
general government. The indirect sources provide supplementary in1
2
3
In addition, valuation at market value may affect the ratio of assets to liabilities. For instance, the
market value of issued shares and other equity is included instead of the book value of equity on the
liabilities side.
Cf. also the description of the households' and non-financial corporations' net worth below.
Appendix 2 includes a review of the instruments, including the subinstruments.
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formation about the sectors for which no direct sources are available, or
where the direct sources are not exhaustive. Examples of indirect sources
are Danmarks Nationalbank's securities statistics (illustrating issues and
holdings of securities across sectors) and counterpart information from
1
the direct sources. In addition, calculations or estimations are performed
in the areas where no primary statistics are available or where the coverage is incomplete. This is the case if a source is only available on an annual
basis (e.g. annual accounts). A more exhaustive description of sources and
methods will be prepared in connection with the first release.
A key element in the compilation of financial accounts is the reconciliation of different primary statistics. The need for reconciliation arises
where there are two (or more) primary sources of the same balances. For
example, there are two independent sources of the MFI sector's holdings
of Danish bonds, viz. the balance-sheet statistics for the MFI sector and
the securities statistics. The purpose of reconciliation is to ensure that
any discrepancies between the sources can be identified, explained and
corrected if required. Since financial accounts are a complete system
covering the assets and liabilities of all sectors in a given financial instrument (e.g. quoted shares), the reconciliation is also aimed at ensuring internal consistency so that the total assets correspond to the total
liabilities for the instrument. In this way the reconciliation process contributes to ongoing quality assurance, not only of the quarterly financial
accounts, but also of the basic primary statistics compiled by Danmarks
Nationalbank.
QUARTERLY FINANCIAL ACCOUNTS FOR DENMARK
2
This section outlines the financial balance sheets of households and
non-financial corporations. These sectors are often focused on in connection with compilation of quarterly financial accounts, partly because
of their significance to e.g. financial stability and economic cycles, partly
because the total net financial asset position of the sectors is not compiled in other statistics. The data sources comprise primarily indirect
sources such as securities statistics, counterpart information from the
MFI statistics and the IIP statistics as regards the sectors' external
accounts.
3
The financial balances shown have been stated on a non-consolidated
basis and cover the period from the 4th quarter of 1998 to the 2nd quar1
2
3
For example, the statistics on the balance sheets and flows of the MFI sector may include (counterpart) information on lending to non-financial corporations, which is included in the compilation of
total borrowing by non-financial corporations.
In the following households include non-profit institutions serving households (cf. Appendix 1).
Accounts between institutional units within the same sector are included in the statistics.
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Chart 1
HOUSEHOLDS – FINANCIAL ASSETS
Kr. billion
2,500
2,000
1,500
1,000
500
0
4
1998
1
2
1999
3
4
1
2
2000
3
4
1
2
2001
3
4
1
2
2002
3
4
1
2
2003
Currency and deposits
Securities other than shares
Shares and other equity
Insurance technical reserves (pension savings)
Note:
Other accounts payable/receivable have been omitted since they amount to less than kr.10 billion over the entire
period.
Source: Danmarks Nationalbank.
ter of 2003. The figures are preliminary since an ongoing revision of the
sources of Danmarks Nationalbank's IIP statistics may affect the balance
sheets. In addition, work is underway to extend the coverage for un1
quoted shares and other equity in the quarterly financial accounts.
The households' total financial assets amounted to just over kr. 2,000
billion as at mid-2003, cf. Chart 1. The largest item by far is insurance
technical reserves, primarily comprising the households' pension savings
2
with pension funds and life-insurance companies. Insurance technical
reserves represent commitments by pension funds and life-insurance companies vis-à-vis policyholders, among others, and comprise the total insurance provisions made by the companies to meet future requirements for
pension disbursements and life-insurance claims. Around a third of the
households' financial assets are currency and deposits, chiefly bank deposits. The households also have large holdings of shares and other equity, more than half of which are mutual funds shares.
The households' total financial assets have to a large extent mirrored
the development in the stock markets. Their direct ownership of shares
is limited, but indirectly households have a considerable amount of as1
2
For instance, the information on the households' holdings of unquoted shares and other equity
issued by non-financial corporations is not comprehensive at present.
Pension savings account for the largest part by far of the insurance technical reserves. The rest comprises e.g. prepaid insurance premiums, cf. Appendix 2.
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sets placed in shares via pension schemes with pension funds and lifeinsurance companies and – to a lesser degree – via mutual funds investing in shares. If the shares held by pension funds, life-insurance companies and mutual funds are included, the households' total (direct and
indirect) ownership of shares as at mid-2003 was almost 20 per cent of
the total financial assets. Only about a third of this volume is owned
directly by the households. The total percentage of shares is lower than
previously, inter alia as a result of pension funds and life-insurance companies having reduced the holdings of shares (and increased the holdings of bonds) in recent years. This has reduced the households' indirect
ownership of shares.
The value of the financial assets in non-financial corporations is lower
than that of the households and was almost kr. 1,300 billion as at mid2003, cf. Chart 2. The financial assets primarily comprise shares and other
equity, most of which is equity in other non-financial corporations or in
foreign companies. The relatively large holdings of shares, etc. are to
some extent attributable to the fact that non-financial holding companies belong to this sector so that their ownership interests in subsidiaries are included. For this reason, non-financial corporations are more
exposed to the stock market than households and larger fluctuations are
seen in the financial assets of non-financial corporations.
As at mid-2003 the total financial liabilities of the households
amounted to almost kr. 1,400 billion. The liabilities primarily comprise
loans, and throughout the period the households' borrowing has been
steadily rising. From end-1998 to mid-2003 the households' total borrowing increased by approximately kr. 350 billion. Around three quarters of the households' borrowing constitutes mortgage-credit loans,
and the increase should therefore be seen against the background of
the rising trend in house prices in recent years and the resulting increased mortgaging options. The rest of the households' loans are primarily raised from banks, while borrowing via e.g. consumer credit is
relatively limited.
Non-financial corporations mainly finance their operations via loans
and issues of shares and other equity, cf. Chart 3. Total borrowing was
on the rise up to 2001, after which is has stabilised at the high level, but
throughout the period there have been significant fluctuations in the
value of the shares, etc. issued, reflecting, inter alia, the general development in the stock markets. Most loans to non-financial corporations
(approximately 60 per cent as at mid-2003) are provided by Danish credit
institutions, primarily banks and mortgage-credit institutes, each accounting for just under half of the lending by credit institutions. However, the corporations also have a significant proportion of foreign loans
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Chart 2
NON-FINANCIAL CORPORATIONS – FINANCIAL ASSETS
Kr. billion
1,600
1,400
1,200
1,000
800
600
400
200
0
4
1998
1
2
1999
3
4
1
2
2000
3
4
1
2
2001
3
4
1
2
2002
3
4
Currency, deposits and loans
Securities other than shares
Shares and other equity
Other accounts receivable/payable
1
2
2003
Note:
Insurance technical reserves (prepaid premiums, etc.) have been omitted since they amount to less than kr. 10
billion over the entire period.
Source: Danmarks Nationalbank.
(almost 30 percent), while the remaining borrowing is attributable to
e.g. financial leasing provided by Danish financing companies. Nonfinancial corporations only to a limited extent finance their activities by
issuing securities other than shares (typically bonds). Since a relatively
Chart 3
NON-FINANCIAL CORPORATIONS – FINANCIAL LIABILITIES
Kr. billion
2,500
2,000
1,500
1,000
500
0
4
1998
1
2
3
4
1999
1
2
3
2000
4
1
2
3
4
2001
1
2002
Loans
Securities other than shares
Shares and other equity
Other accounts receivable/payable
2
3
4
1
2
2003
Source: Danmarks Nationalbank.
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Chart 4
NET FINANCIAL ASSETS
Kr. billion
900
Kr. billion
-700
850
-750
800
-800
750
-850
700
-900
650
-950
600
-1,000
550
-1,050
-1,100
500
4
1
2
3
4
1
2
3
2000
1998 1999
Households
4
1
2
3
2001
4
1
2
2002
3
4
1
2
2003
Non-financial corporations (right-hand axis)
Source: Danmarks Nationalbank.
large proportion of loans are raised from mortgage-credit institutes,
which are required under the balance principle to finance lending via
bond issues, a significant proportion of the capital base of non-financial
corporations is, however, indirectly attributable to issues of securities
other than shares.
The households' net financial assets have been positive throughout
the period and were approximately kr. 650 billion as at mid-2003, cf.
Chart 4. Total net assets have declined since the 3rd quarter of 2000,
partly as a result of the households' increased borrowing, partly due to
the development in the value of the share holdings, including the value
of shares owned indirectly via pension funds and life-insurance companies, as well as mutual funds.
The households' net financial assets in Chart 4 are calculated including the value of insurance technical reserves (pension savings). Since
this asset cannot be immediately realised, from an economic perspective it can also be relevant to consider the net financial assets excluding
insurance technical reserves. This measure of the households' net financial assets is generally negative, and in mid-2003 net financial debt
was approximately kr. 300 billion. Net assets excluding insurance technical reserves are not to the same extent affected by fluctuations in
stock prices and therefore show a more stable trend.
An assessment of the households' total financial position should take
into account the fact that the households also hold considerable non-
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financial assets. The value of the housing stock and the households' fleet
of vehicles can, viewed in isolation, be calculated at around kr. 1,350 bil1
lion at the beginning of 2002 so that total net (financial and nonfinancial) assets can be estimated to lie somewhere around kr. 2,000 billion. Overall the households are therefore relatively well-consolidated.
The decrease in net financial assets in recent years should be seen against
the background of the increase in housing prices, and thus the value of
the housing stock, in the same period.
For non-financial corporations net financial assets are negative, cf.
Chart 4. The reason is that much of the capital base of these corpora2
tions is placed in non-financial assets (tangible assets and goodwill).
Since non-financial corporations have a negative net position in shares
(i.e. the value of the issued shares on the liabilities side exceeds the
holdings of shares on the asset side), net assets will typically move in the
opposite direction of the stock markets. This explains why e.g. rising
stock prices up to the 3rd quarter of 2000 led to lower net assets. The
development in stock prices also explains some of the large fluctuations
in net assets seen at times. The tendency for the net assets of nonfinancial corporations to fall more or less throughout the period is attributable to increased borrowing, among other things.
ECONOMIC APPLICATIONS
Quarterly financial accounts provide a detailed picture of the financial
structures of the whole economy and also make it possible to calculate
net financial assets by sectors. This makes the statistics applicable for e.g.
economic analyses and forecasts, analyses of financial-stability issues, and
analyses of monetary-policy issues, cf. e.g. Mink (2002) and ECB (2000) for
a general description of the ECB's use of quarterly financial accounts for
the euro area.
In connection with economic analyses and forecasts, quarterly financial
accounts may provide information on the current savings of the private
sector, as well as input for projections of e.g. private consumption and
business investments where wealth (the net worth or subitems on the
balance sheet) may be a relevant factor. In economic models it is customary to include a measure of the households' wealth in an explanation of
the development in private consumption, cf. e.g. MONA, Danmarks Na3
tionalbank's quarterly model of the Danish economy. In this case, quar1
2
3
Cf. Statistics Denmark (2002b) and Statistics Denmark (2003). The housing stock includes the value of
business buildings owned by households.
At the beginning of 2002, the value of the capital stock was kr. 1,950 billion, cf. Statistics Denmark
(2002b).
See Danmarks Nationalbank (2003a).
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terly financial accounts provide a current statement of the financial part
of the net worth, and the information on balance-sheet composition may
be used for assessing whether and to which extent a given development
in the financial markets affects the sectors' net worth. Viewed in isolation,
borrowing by households and non-financial corporations may also be
interesting in connection with an assessment of economic prospects, although the effects on real-economic activity are ambiguous. On the one
hand, increased debt may be a sign of increased loan-financed demand.
On the other hand, increased debt will – all other things being equal –
lower the creditworthiness of borrowers, which could lead to lower demand as a consequence of higher loan costs or even credit rationing.
1
Financial accounts can also be used for analyses of financial stability.
2
The statistics are used for compiling "Macro-prudential indicators" ,
which, inter alia, comprise a measure of the non-financial sectors'
indebtedness defined as debt (loans raised plus the value of issued
securities other than shares) as a ratio of GDP. Higher debt for these
sectors might affect financial stability since the consequence may be a
larger volume of bad loans, which could entail losses to banks, among
others.
In Denmark, the indebtedness of non-financial corporations and
households has been increasing over the period as a whole, cf. Chart 5.
The level of household indebtedness in Denmark is among the highest
3
in the EU , presumably as a result of the Danish mortgage-credit system, which provides good opportunity for borrowing against real
property as collateral. For instance, it is possible to borrow against the
non-mortgaged value of the properties in Denmark, a practice which is
4
not so widespread in other EU member states . The indebtedness of
non-financial corporations in Denmark is in line with that of the euro
area member states.
However, indebtedness cannot be viewed in isolation in terms of financial stability. Higher debt may thus be a result of an increase in the
value of the non-financial assets since increased indebtedness among
households could be supported by greater housing wealth. Likewise, it is
relevant to include financial assets in an assessment of the sectors'
wealth. For Danish households, the growing indebtedness since 1998 has
gone hand in hand with an equivalent increase in the value of the fi-
1
2
3
4
Cf. Danmarks Nationalbank (2003b) for the latest edition of Danmarks Nationalbank's annual report
on financial stability in Denmark.
See Mink and Silva (2003) for a review of Macro-prudential indicators. The IMF operates with a
number of similar key indicators, called Financial Soundness Indicators, see Sundararajan et al. (2002).
See ECB (2002).
See ECB (2003).
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Chart 5
INDEBTEDNESS IN DENMARK AS A PERCENTAGE OF GDP
Per cent
110
100
90
80
70
60
50
4
1
2
3
4
1998 1999
1
2
3
2000
Non-financial corporations
4
1
2
3
2001
4
1
2002
2
3
4
1
2
2003
Households
Source: Danmarks Nationalbank.
nancial assets. As at mid-2003 the net financial assets were thus at the
same level as at the start of the period, cf. Chart 4.
Financial accounts may also be used in connection with analyses of
monetary-policy issues, including analyses of the economic impacts of a
change in monetary-policy interest rates (analyses of the monetarypolicy transmission mechanism). Among other things, these impacts depend on the composition of the financial balance sheets of non-financial
corporations and households since this may affect the sectors' reactions
to changes in e.g. prices in the financial markets, as well as the credit
1
institutions' lending and deposit rates.
Compared with the euro area, Danish households have a larger proportion of insurance technical reserves in their financial assets and consequently a lower proportion of shares and other equity, cf. Chart 6. The
holdings of unquoted shares among Danish households may, however,
be slightly underestimated since complete statistics are not currently
available for the households' ownership share of non-financial corporations. Overall, it is clear that Danish households have placed a larger
proportion of their assets with pension funds and life-insurance companies and thus to a larger extent own securities indirectly. This may
affect the impact on household behaviour of movements in the financial
1
See ECB (2002). For a review of the impact of financial structures on the credit channel in the
monetary-policy transmission mechanism, see Pedersen (2003).
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Chart 6
THE HOUSEHOLDS' FINANCIAL ASSETS, END-2001
Euro area
Denmark
Deposits, ect.
Securities other than
Shares and other
Insurance technical reserves (pension savings)
Note:
Deposits, etc. also include loans and the holdings of banknotes and coins. Other accounts receivable/payable
have been omitted since they constitute less than 2 per cent of total assets.
Source: Danmarks Nationalbank and Eurostat.
markets since insurance technical reserves are not normally a visible part
of the households' wealth. The households' reactions to changes in financial prices may therefore be more subdued than if the securities had
been owned directly. Moreover, Denmark differs from the euro area in
that almost three quarters of household savings are funnelled into financial corporations (in the form of deposits and insurance technical
reserves), which is somewhat higher than the level in the euro area.
In relation to the euro area, non-financial corporations in Denmark
make less use of share issues, but rather tend to raise loans, cf. Chart 7.
Access to and the costs of raising loans, including loans from Danish
credit institutions, are therefore of greater significance to the financing
base of Danish corporations, whereas non-financial corporations in the
euro area are more dependent on liquidity and prices in the stock mar-
NON-FINANCIAL CORPORATIONS' FINANCIAL LIABILITIES, END-2001
Euro area
Loans, etc.
Securities other than shares
Chart 7
Denmark
Shares and other equity
Other
Note:
Loans, etc. also include deposits. Other comprises the instruments insurance technical reserves and other accounts receivable/payable.
Source: Danmarks Nationalbank and Eurostat.
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1
kets. This could indicate that credit extension via credit institutions plays
a larger role in monetary-policy transmission in Denmark. The special
credit extension by mortgage-credit institutes and its significance to the
financing of non-financial corporations should also be included in a
more detailed analysis of the transmission mechanism in Denmark, cf.
Pedersen (2003).
CONCLUSION
In April, Danmarks Nationalbank will begin to regularly publish quarterly financial accounts for Denmark. The statistics will initially include
information on the financial balance sheets for the main sectors of the
economy since end-1998. For illustration purposes, this article presents a
preliminary extract in the form of financial balance sheets for households and non-financial corporations. Next year the quarterly financial
accounts published will be extended to include financial flows.
The development of quarterly financial accounts for Denmark is a consequence of similar measures at the European level. This article outlines
some of the possible applications, including the ECB's use of quarterly
financial accounts for the euro area. Likewise, the Federal Reserve
applies very extensive "Flow-of-Funds" statistics as an element of its
decision-making concerning monetary policy in the USA. For a description of the application in the USA, reference is made to Teplin (2001).
1
There are, however, major differences in the composition of the non-financial corporations' liabilities
in the individual euro area member states. Share issues constitute a relatively large proportion of
financing in e.g. Spain, France and Italy, while loans play a fairly significant role in e.g. Germany and
Austria, cf. ECB (2002).
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LITERATURE
Danmarks Nationalbank (2003a), MONA – a quarterly model of the
Danish economy.
Danmarks Nationalbank (2003b), Financial Stability.
Statistics Denmark (2001), Financial Accounts 1995-1999, Statistical
Reports (in Danish), National Accounts and Balance of Payments, No.
2001:5.
Statistics Denmark (2002a), Financial Accounts for General Government
Q1 2002, Statistical Reports (in Danish), Public Finance, No. 2002:20.
Statistics Denmark (2002b), Fixed Real Capital 2002, Statistical Reports (in
Danish), National Accounts and Balance of Payments, No. 2002:14.
Statistics Denmark (2003), Value of Consumers' Vehicles, etc. 1993- 2002,
Statistical Reports (in Danish), National Accounts and Balance of
Payments 2003:14.
ECB (2000), Statistical Information Collected and Compiled by the European System of Central Banks.
ECB (2001), Financing and financial investment of the non-financial
sectors in the euro area, Monthly Bulletin, May.
ECB (2002), Report on financial structures.
ECB (2003), Structural Factors in the EU Housing Markets.
Mink, Reimund (2002), Quarterly Monetary Union Financial Accounts for
ECB Monetary Policy Analysis, IFC Bulletin No. 12.
Mink, Reimund and Nuno Silva (2003), The Use of Financial Accounts in
Assessing Financial Stability (paper presented at a meeting of the OECD
Working Party on Financial Statistics on 6-7 October 2003).
Pedersen, Anders Mølgaard (2003), The Credit Channel in MonetaryPolicy Analyses, Danmarks Nationalbank, Monetary Review, 4th Quarter.
Sundararajan V., et al. (2002), Financial Soundness Indicators: Analytical
Aspects and Country Practices, IMF Occasional Paper 212.
Teplin, Albert M. (2001), The US Flow of Funds Accounts and Their Uses,
Federal Reserve Bulletin, July.
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APPENDIX 1 – SECTORS IN FINANCIAL ACCOUNTS
Under ESA 1995, a distinction is made between a number of domestic
sectors and the rest of the world, where the domestic part is generally
broken down according to economic activity by the sectors households,
1
etc. , financial corporations, non-financial corporations and general government. Financial corporations include corporations which are principally engaged in financial intermediation, i.e. channelling financial assets from persons or enterprises with savings surpluses to persons or
enterprises with savings deficits. ESA 1995 divides this sector into five
subsectors (cf. sectors S.121-S.125 below), where the enterprises are
grouped by type of financial intermediation. This provides for a more
detailed analysis of the financial structure of the economy.
The sectors in financial accounts are as follows (with the ESA 1995 codes
in brackets):
•
Non-financial corporations (S.11)
This sector includes enterprises whose principal activity is the production
of goods and non-financial services. Examples include manufacturing
enterprises and service enterprises.
•
Danmarks Nationalbank (S.121)
The national central bank, which has been listed as a separate unit under the main sector monetary financial institutions (comprising S.121
and S.122).
•
Other monetary financial institutions (S.122)
This sector consists of all corporations which are principally engaged in
financial intermediation and whose business is to receive deposits
and/or close substitutes from the general public. The sector comprises
banks, mortgage-credit institutes, other credit institutions and moneymarket funds and corresponds to the reporting population for Danmarks Nationalbank's statistics on the balance sheets and flows of the
MFI sector.
•
Other financial intermediaries (S.123)
This sector can be seen as a residual group of financial corporations since
it comprises corporations that are financial intermediaries, but which do
not fit into the other financial subsectors, e.g. mutual funds, financial
1
Including non-profit institutions serving households.
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holding companies, leasing companies, investment companies and companies providing consumer credit (e.g. via charge cards).
•
Financial auxiliaries (S.124)
The corporations in this sector are principally engaged in auxiliary financial activities, e.g. in connection with financial transactions. Among
others, the sector comprises stockbrokers, insurance brokers, the Copenhagen Stock Exchange and VP Securities Services.
•
Insurance corporations and pension funds (S.125)
Basically, this sector consists of all insurance companies and pension
funds. However, the sector does not comprise public pension schemes to
which certain population groups must by law make contributions (e.g.
the Labour Market Supplementary Pension Fund – ATP).
•
General government (S.13)
Includes all authorities and institutions whose principal function is to
supply (non-market) public services to citizens and/or to redistribute
income and wealth. In Denmark, this sector can be divided into three
subsectors: central government, local government, and social security
funds, the latter primarily the Labour Market Supplementary Pension
Fund (ATP).
•
Households (S.14)
The households sector covers all consumers and sole proprietorships and
partnerships without independent legal status.
•
Non-profit institutions serving households (S.15)
This sector consists of non-profit institutions supplying goods and services to households, e.g. trade unions and charities.
•
Rest of the world (S.2)
This sector comprises Danish residents' financial accounts with nonresidents, i.e. households, enterprises, etc. domiciled abroad.
In the quarterly financial accounts published for Denmark, the sectoral
breakdown will be simplified in relation to the above in that the sectors
financial auxiliaries and non-profit institutions serving households (whose
balance-sheet totals are relatively modest) will be included under other
financial intermediaries and households, respectively.
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APPENDIX 2 – INSTRUMENTS IN FINANCIAL ACCOUNTS
In the financial accounts, the following principal instruments will be
included under both assets and liabilities for the individual sectors (with
the equivalent ESA 1995 codes in brackets):
•
Monetary gold and special drawing rights (AF.1)
This instrument is only relevant for central banks and comprises the
foreign-exchange-reserve assets monetary gold (AF.11) and special draw1
ing rights (AF.12).
•
Currency and deposits (AF.2)
Comprises banknotes and coins in circulation (AF.21), transferable
deposits (AF.22), i.e. typically sight deposits, and other types of deposits
(AF.29), including time deposits and deposits at notice.
•
Securities other than shares (AF.3)
Comprises negotiable securities which do not give the holder ownership
rights in relation to the issuer. This instrument is divided into short-term
securities (AF.331), long-term securities (AF.332) and financial derivatives
(AF.34). Classification as long- or short-term securities, respectively, refers to whether the original maturity (i.e. the term to maturity at issue)
was more or less than 1 year. Short-term securities include e.g. Treasury
bills and certificates of deposit, while long-term securities include e.g.
government and mortgage-credit bonds.
•
Loans (AF.4)
Loans are divided into short-term loans (AF.41), i.e. loans with an original maturity of 1 year or less, and long-term loans (AF.42) with an
original maturity of more than 1 year.
•
Shares and other equity (AF.5)
This instrument comprises quoted shares (AF.511), unquoted shares
(AF.512) and the residual group other equity (AF.513), comprising e.g.
ownership interests in cooperative societies, limited partnerships, etc.
The principal instrument also includes mutual fund shares (AF.52).
•
Insurance technical reserves (AF.6)
This instrument comprises insurance companies' and pension funds' provisions to cover obligations vis-à-vis policyholders and beneficiaries. The
1
Special drawing rights comprise SDR deposits, where SDRs are international reserve assets created by
the IMF and allocated to its members as a supplement to the existing reserve assets.
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instrument can be subdivided into net equity of households in life insurance reserves (AF.611), comprising the insurance companies' provisions
for life insurance, and net equity of households in pension fund reserves
(AF.612), comprising the pension funds' reserves for pension disbursements to households. The instrument also includes prepayments of insurance premiums and reserves for outstanding claims (AF.62), comprising e.g. amounts due to policyholders in the form of prepaid premiums,
as well as the companies' provisions to cover actual incidents for which
damages have not yet been paid. Most insurance technical reserves belong to the households in that they relate to their pension savings.
•
Other accounts receivable/payable (AF.7)
This instrument comprises trade credits and advances (AF.71) and other
accounts receivable/payable, except trade credits and advances (AF.79),
including e.g. tax payable and social benefits receivable.
In the quarterly financial accounts published the distribution by instruments will be simplified in relation to the above since it is not possible to
separate all instruments on the basis of the existing data. For instance,
unquoted shares and other equity will be stated under one, and other
accounts receivable/payable will not be subdivided.
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The EU's Financial Services Action Plan
Dorte Kurek, Financial Markets
INTRODUCTION
The work to establish a single market for financial services in the EU was
initiated in the 1970s but only really gathered momentum in connection
with the capital liberalisation and the 2nd generation directives in the
late 1980s. The introduction of the euro as the single currency has
strengthened this process. The European Commission's Financial Services
Action Plan was introduced in 1999 and includes 47 proposals aimed at
removing the remaining legislative and regulatory barriers to a single
financial market in the EU. The proposals must be adopted at the latest
by April 2004 and implemented by the member states by 2005. Presently
36 proposals have been finally adopted. In 2001 a new decision-making
procedure, the Lamfalussy process, was introduced in order to make the
regulation process for securities markets more efficient.
This article takes stock of the work of creating a framework for financial integration in the EU, focusing on the following three areas: the key
measures in the Financial Services Action Plan, the Lamfalussy process
and future work.
FINANCIAL INTEGRATION
Financial integration implies that previously separate national financial
markets start functioning as one integrated market. An integrated financial market, as in the USA, offers a number of advantages. The first is
more liquid financial markets and a wider product range. This enables
investors to diversify their investments. Furthermore, competition is intensified within the group of banks and other financial intermediaries,
resulting in a wider range of financial products and lower prices. Finally,
with the improved diversification possibilities, the supply of risk capital
increases. A study by London Economics, PricewaterhouseCoopers and
Oxford Economic Forecasting at the request of the European Commission concludes that due to lower funding costs in banks and on the fi-
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nancial markets, financial integration will in the longer term lead to an
1
increase in the EU-wide real GDP by 1.1 per cent.
The EU creates the overall legislative and regulatory framework for an
integrated financial market. Subsequently the degree of financial integration is primarily determined by the market participants' behaviour.
Barriers in the form of language and cultural differences, high nonrecurring costs when entering a new market, insufficient knowledge of
markets and business enterprises in other countries and the need for
personal contacts may lead to a low degree of financial integration even
though the legislative framework is in place. Thus wholesale markets are
generally more integrated than retail markets because the retail markets
are characterised by cultural and language differences across countries
and by a greater need for personal contacts. Furthermore retail markets
may be more influenced by national consumer legislation, tax rules, etc.
The study by London Economics and others estimates that the financial
integration in the EU has increased significantly during recent years as a
result of the work of establishing a single financial market in the EU, the
introduction of the euro, technological advances and globalisation. This
has led to inter alia the development of more financial products and a
gradual shift in business enterprises' sources of financing from traditional bank-based financing and towards an increasingly market-based
approach to raising capital. Another effect is that households have become increasingly active in the stock markets.
The financial integration in the EU has not yet reached the level in the
USA, however.
STATUS OF THE FINANCIAL SERVICES ACTION PLAN
Since the work of establishing an internal financial market started in the
1970s a large number of measures has been implemented in order to
create secure and uniform conditions with regard to supervision and
regulation to enable financial institutions to trade across national borders.
The introduction of the euro has accelerated the integration process
and increased the authorities' and market participants' focus on removing the remaining barriers. At the European Council in Cardiff in
1998 it was decided to request that the European Commission table an
1
London Economics in association with PricewaterhouseCoopers and Oxford Economic Forecasting,
Quantification of the Macro-Economic Impact of Integration of EU Financial Markets, November
2002. Other similar studies include Friedrich Heinemann, Mathias Jopp, The Benefits of a Working
Retail Market for Financial Services, Report to the European Financial Services Round Table, 2002, as
well as Paolo Cecchini, The European Challenge 1992. The Benefits of a Single Market, 1988.
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action plan which could bring the EU to completion of a single financial
market.
In 1999 the European Commission launched the Financial Services Action
Plan. The Action Plan prioritises the work of implementing the single financial market and aims to remove legislative and regulatory barriers that
prevent the establishment of secure and integrated financial markets
within the EU. The Action Plan contains 42 original and 5 supplementary
proposals to be implemented by 2005. A key element is to refine and expand the common rules for providers of financial services, the "European
passport" for financial services. The European passport enables financial
providers who are approved in one EU member state to provide the same
financial products in another EU member state without a new approval.
The Action Plan seeks to ensure financial stability in a world of integrated
financial markets and with financial providers operating across industries
and national borders. This includes clear and uniform supervision rules
and very close cooperation between supervisory authorities across national borders. The contents and status of the key measures are described
in Box 1.
Presently 36 of the 47 proposals in the Action Plan have been
1
adopted . The European Council has decided that all proposals must be
adopted by April 2004 at the latest. This gives the member states at least
18 months until the implementation deadline in 2005, taking account of
the elections to the European Parliament in the summer of 2004. Initially, proposals regarding the securities market should have been implemented in 2003, but some proposals are expected to be adopted only
in 2004. The IAS Regulation, the Financial Conglomerates Directive and
the directive on insider dealing and market manipulation were adopted
during the Danish EU Presidency, and political agreement was reached
on the Prospectus Directive.
THE LAMFALUSSY PROCESS
The Lamfalussy process is a decision-making procedure introduced on
securities markets in 2001. In 2002 it was proposed that the process be
extended to the entire financial area (credit institutions, insurance and
pensions, and securities). The introduction of the Lamfalussy process
aimed at ensuring more efficient regulation on securities markets in
order to keep up with the rapid development and to provide for implementation of the extensive financial services action plan within the
time limit. Previously, the legislative process tended to be slow and the
1
European Commission, Progress on the Financial Services Action Plan, Annex, 25 November 2003.
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CONTENTS AND STATUS OF KEY MEASURES
Box 1
In the following the contents of the key measuress are summarised, and the status of
the individual measures appears from the Table.
The financial markets
Directive on insider dealing and market manipulation contains common rules to combat market abuse in the EU. The directive updates the existing EU rules on insider
dealing, which are 10 years old, so that new financial products are included. Common
rules on regulation of market manipulation have been added as well.
Directive on takeover bids aims at harmonising rules for cross-border acquisitions of
listed companies in the EU. The purpose is to strengthen the legal certainty of crossborder takeover bids and to ensure protection for the minority shareholders.
The IAS Regulation stipulates that listed companies prepare their consolidated accounts in accordance with the international accounting standards. The provisions will
enter into force on 1 January 2005. The regulation, among other things, contributes
to removing barriers to cross-border securities trading as the companies' financial information becomes more transparent and comparable.
The Investment Services Directive should promote the creation of transparent, efficient and integrated financial markets by requirements of increased transparency on
the markets and harmonisation of the rules concerning the various types of marketplace1. Furthermore the protection of investors in the EU member states is sought enhanced through harmonising the conduct of business rules and ensuring the best execution of a securities deal for the client. The directive replaces the current directive
from 1993 which is out of date in areas such as investor protection, types of investment services on the market and the market structure.
The Prospectus Directive is to create better and more uniform conditions for investing and raising capital in the EU. This implies e.g. that a prospectus which has been
approved in one member state can freely be listed and offered in all other member
states and thus obtain a European passport for prospectuses. Another objective is to
enhance consumer protection for investing in securities. The directive thus contains a
number of provisions on the contents of prospectuses to make them more uniform.
The objective of the Transparency Directive is to lay down minimum requirements
to harmonise the information to be published by issuers of securities listed in a regulated market, e.g. a stock exchange. The information on the issuers of the securities
should contribute to better investment decisions.
The UCITS directives include provisions on e.g. authorisation, supervision, investment policy and transparency requirements for investment funds (UCITS) and management companies. An important element is to enable the management companies
to achieve a European passport that gives access to operate in other member states. In
addition, the directives adjust the current UCITS directive to the market development
as regards the included products.
Financial supervision
The Capital Adequacy Directive comprises capital-adequacy provisions for banks, other
credit institutions and investment undertakings and is to a large extent based on the
standards of the Basel Committee, Basel II2. The existing capital-adequacy rules, the
Basel I Accord, from 1988 have contributed to ensuring a level playing field for banks
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CONTINUED
Box 1
with cross-border activities. However, new financial products and more sophisticated
risk management in the credit institutions have called for more up-to-date rules. The
objective of the new Basel II Accord is for the capital requirement to reflect more
clearly the risks incurred by the individual credit institution.
The Financial Conglomerates Directive aims at ensuring a level playing field for different types of financial groups by imposing a number of obligations that transcend
sector divides and national borders. Furthermore, coordination of supervision across
borders is stated. The directive seeks to take account of a number of group risks, including ensuring that capital is solely used to meet capital requirements in one company within the group; that group structures are transparent; that intra-group transactions take place on market terms; and that risks in one company do not contaminate other entities of the group.
STATUS OF MEASURES IN THE FINANCIAL SERVICES ACTION PLAN
Pending proposals
Reinsurance Supervision Directive
3rd Money Laundering Directive ........................................
Directive on risk-based capital (capital adequacy) ............
Legal framework for payments ..........................................
14th Company Law Directive ..............................................
Directive on insurance solvency II (capital adequacy) .......
Plan for proposal
1st quarter 2004
2nd quarter 2004
2nd quarter 2004
2nd quarter 2004
3rd quarter 2004
2005
Presented proposals which are not adopted
Directive on Take Over Bids ...............................................
10th Company Law Directive ..............................................
Transparency Directive ........................................................
Investment Services Directive..............................................
Plan for adoption
1st quarter 2004
1st quarter 2004
1st quarter 2004
2nd quarter 2004
Table
Adopted proposals which are not implemented
Implementation deadline
Directives on UCITS (amendments) ....................................
1st quarter 2004
Directive on fair value accounting......................................
1st quarter 2004
Directive on the taxation of savings income ......................
1st quarter 2004
Directive on winding-up of credit institutions ...................
2nd quarter 2005
Financial Conglomerates Directive .....................................
3rd quarter 2004
Directive on distance marketing of consumer financial
4th quarter 2004
services.................................................................................
European Company Statute ................................................
4th quarter 2004
Directive on insider dealing and market manipulation .....
4th quarter 2004
Regulation on international accounting standards ...........
1st quarter 2005
Directive on modernising of the accounting provisions.....
1st quarter 2005
Directive on insurance mediation .......................................
1st quarter 2005
Directive on prospectuses....................................................
2nd quarter 2005
Directive on institutions for occupational retirement
3rd quarter 2005
provision .............................................................................
Source: European Commission, Progress on the Financial Services Action Plan, Annex, 25 November 2003 and
European Commission, The FSAP enters the Home Straight, Ninth progress report, 25 November 2003.
1
2
The Investment Services Directive is described in Birgitte Bundgaard and Anne Reinhold Pedersen, The Investment Services Directive – a New Basis for Securities Trading in Europe, Danmarks Nationalbank, Monetary
Review, 4th Quarter 2003.
The Basel Committee's proposal for new standards is described in Lisbeth Borup and Morten Lykke, New
Capital-Adequacy Rules for Credit Institutions, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2003.
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THE LAMFALUSSY PROCESS
Box 2
The Lamfalussy process was established at the recommendation of the Committee of
Wise Men on the Regulation of European securities markets chaired by Professor
Alexandre Lamfalussy, former President of the European Monetary Institute. The
Committee of Wise Men was set up by the Ecofin Council in July 2000 with a view to
making regulation in the securities markets more efficient. The Lamfalussy process in
the securities area was adopted by the European Council in Stockholm in March 2001
and includes:
• Level 1: The European Commission presents proposals for legislation based on advice from a number of committees, cf. below. The proposals lay down the key general principles and are adopted in co-decision by the Ecofin Council and the European Parliament.
• Level 2: The technical details laid down within the framework of level 1 are considered under the comitology procedure. Here the European Securities Committee
(ESC) together with the European Commission lay down the rules following advice
by the Committee of European Securities Regulators (CESR).
• Level 3: The CESR proposes consistent implementation of specified rules. The CESR
can provide voluntary guidelines and common standards. The supervisory authorities also cooperate in the CESR.
• Level 4: The European Commission supervises that the member states comply with
the provisions. If necessary, the European Commission can bring action against the
member states at the European Court of Justice.
In December 2002 the Ecofin Council decided to extend the Lamfalussy process to the
remaining financial area (credit institutions, insurance and pensions). In connection
with the extension a number of new committees are established with a view to advising the European Commission under level 1, participating in the comitology procedure under level 2 and ensuring uniform implementation of the provisions (supervision) under level 3 in the new areas as regards the Lamfalussy process. The proposed
committee structure for the entire financial service sector is summarised in the Chart
and the Table overleaf.
The advisory and comitology committees are composed of high-level representatives from the relevant national ministries, while the supervisory committees are composed of high-level representatives from the national supervisory authorities. Central
banks without supervisory responsibilities are also represented in the Committee of
result could reflect some legal uncertainty, e.g. due to political disagreement which gave room for national interpretation.
Under the Lamfalussy process the Ecofin Council and the European
Parliament adopt the legal framework that lays down key principles in
the area in question (level 1). The technical measures are adopted under
the so-called comitology procedure whereby the European Commission,
assisted by senior representatives from the relevant national ministries,
prepares detailed rules within the given framework (level 2). Further-
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CONTINUED
Box 2
European Banking Supervisors (CEBS). The directive on insurance solvency II is considered under CEIOPS as the first directive in this structure.
PROPOSED FINANCIAL SERVICES COMMITTEE STRUCTURE
European Commission
• Proposal for a directive
• Comitology
Level 1
Ecofin Council
ESC
European Parliament
EBC
EIOPC
Key
Principles
Level 2
Details and
technical measures
Level 3
CESR
CEBS
CEIOPC
PROPOSED FINANCIAL SERVICES COMMITTEE STRUCTURE
Banking
Supervision
Table
Insurance and pensions
Securities
Advisory function for level
1,
Comitology function under
level 2
The European
Banking Committee (EBC)
The European Insurance
and Occupational Pensions Committee (EIOPC)
The European
Securities Committee (ESC)
Supervisory function under
level 3
The Committee
of European
Banking Supervisors (CEBS)
The Committee of
European Insurance and
Occupational Pensions
1
Supervisors (CEIOPS)
The Committee
of European
Securities Regulators (CESR)
Source: The Commission of the European Communities, Proposal for a directive of the European Parliament and of
the Council amending Council Directives 73/239/EEC, 85/611/EEC, 91/675/EEC, 93/6/EEC and 94/19/EC and
Directives 2000/12/EC, 2002/83/EC and 2002/87/EC of the European Parliament and of the Council, in order
to establish a new financial services committee organisational structure.
1
Henrik Bjerre-Nielsen, Director General, Danish Financial Supervisory Authority, is the chairman of CEIOPS.
more, a number of supervisory committees have been appointed in
order to e.g. advise the European Commission and the regulatory committees on supervision issues and ensure uniform implementation of
the rules (level 3). In many ways the process is similar to the Danish legislative process in the financial area where the Folketing (Parliament)
promulgates acts with the overall framework, while the Danish Financial
Supervisory Authority lays down the technical rules in executive orders.
The Lamfalussy process is described in detail in Box 2.
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A special committee, the Financial Services Committee, FSC, has been
appointed. The committee consists of senior officials from the national
ministries of finance and economic affairs. FSC advises the Ecofin Council
and the European Commission on financial integration issues. The tasks
of the FSC include supervision of implementation of the Action Plan,
clearing and settlement as well as corporate governance in relation to
financial markets. The FSC also advises on coordination and cooperation
between national authorities in the areas of crisis management and
financial stability.
Experience with the Lamfalussy process
The Lamfalussy process distinguishes between political legal framework
principles (level 1) and technical measures (level 2) in order to make the
legislative process more efficient. It is important to strike the right balance between the two levels. The legal framework under level 1 must be
of a general nature to give the European Commission and the national
officials room to develop the technical details. At the same time the
legal framework should settle the most important political differences
so that these are not left for the European Commission and the officials
to resolve.
The initial measures in connection with the Lamfalussy process are the
directive on insider dealing and market manipulation, the Prospectus Directive, the Investment Services Directive and the Transparency Directive. A
group appointed by the European Commission, the Ecofin Council and the
European Parliament assesses that generally the process is faster and more
1
efficient than the previous practice . For example, it took less than one
year to adopt the second Investment Services Directive, whereas it took six
years to adopt the first one in 1993. However, experience also shows that
it has been difficult to strike the right balance between level 1 and level 2
in the legislative process. There are incidences of too detailed framework
2
principles that leave insufficient room for the comitology procedure , and
incidences where political differences were not resolved satisfactorily under level 1. Finally, it is generally agreed that the national implementation
of the directives is not always uniform.
FUTURE WORK TOWARDS FINANCIAL INTEGRATION
The legislative part of the Action Plan is now in its final phase. As the
last proposals are adopted focus will shift towards timely and uniform
1
2
Inter-Institutional Monitoring Group, Second Interim Report Monitoring the Lamfalussy Process,
December 2003.
ECB, Monthly Bulletin, October 2003, The integration of Europe's financial markets.
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implementation of the directives in the individual member states, including the acceding countries, and adjustment of legislation in line with the
development in the financial markets. Also, the dialogue on regulation
of the financial markets with authorities outside the EU, e.g. in the USA,
will be enhanced.
The European Commission has set up four expert groups within the
areas of banking, insurance, securities and asset management to assess
the effectiveness of the measures in the Action Plan and the status of
financial integration in the EU. The expert groups' reports will be published for consultation during the summer of 2004.
There are strong indications that the decision-making process within
the financial area will be changed with the new constitutional Treaty for
the EU. Negotiations on the draft Treaty Establishing a Constitution for
Europe broke down at the EU Summit in Brussels in December 2003, so
the development is still uncertain. The draft Treaty presented at the EU
Summit in Brussels in December 2003 suggests a decision-making process
similar to the Lamfalussy process. However, the essential difference is
that the proposed decision-making process does not contain a comitology procedure in which national experts are consulted. On the
other hand, it is acknowledged that the comitology procedure can be
maintained as a voluntary consultation procedure. The Irish Presidency
has not yet indicated how negotiations on the constitutional Treaty will
be continued.
FURTHER INFORMATION ON THE FINANCIAL SERVICES ACTION PLAN
Further information on the EU's Financial Services Action Plan can be
found using the following links:
• The European Commission:
http://europa.eu.int/comm/internal_market/finances_en.htm
• The European Parliament, the Committee on Economic and Monetary
Affairs: www.europarl.eu.int/committees/econ_home.htm
• The
Committee of European Securities Regulators (CESR):
www.europefesco.org
• Federation of European Securities Exchanges (FESE):
www.fese.be/initiatives/european_representation/index.htm
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Press releases
10 DECEMBER 2003: ELECTION TO THE COMMITTEE OF DIRECTORS OF
DANMARKS NATIONALBANK
Ms. Pernille Blach Hansen, MP, has withdrawn from the Committee of
Directors. The Board of Directors has elected Ms. Pia Gjellerup, MP, as
new member of the Committee of Directors for the remainder of the
term ending on 31 March 2004.
13 JANUARY 2004: FINANCIAL MANAGEMENT AT DANMARKS
NATIONALBANK
Today Danmarks Nationalbank publishes the book Financial Management at Danmarks Nationalbank. The book provides a description of the
principles and methodologies used in connection with management of
the foreign-exchange reserve and other portfolios. Danmarks Nationalbank considers it important to provide a comprehensive description of
the principles for financial management and to ensure that the principles are available to the general public.
Danmarks Nationalbank is one of the first central banks to publish a
full description of the management of the foreign-exchange reserve.
The description covers considerations related to the decision-making
process and distribution of responsibility as well as risk management and
performance measurement. The composition of Danmarks Nationalbank's balance sheet and the financial result is also described.
The cornerstone of financial management is the fixed-exchange-rate
policy, although good returns are also an objective to Danmarks Nationalbank. The choice of risk level is characterised by prudence. Management of the individual types of risk reflects that Danmarks Nationalbank
seeks to avoid major losses as a result of changes in interest-rate risk and
currency risk, and the aim is to completely avoid losses as a consequence
of counterparty failure.
The book is available in Danish and English.
19 JANUARY 2004: NEW FAROESE 200-KRONE BANKNOTE
Today a Faroese 200-krone banknote is issued. This is a new denomination in the Faroese banknote series.
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The motif on the face of the 200-krone banknote is a Ghost Moth, Hepialus humuli, printed in intaglio. The Ghost Moth, which spreads its wings
across the banknote, is found all over the Faroe Islands. The background
is reproduced from a watercolour with blades of grass. The motif of
Tindhólmur near Vágar on the reverse of the banknote is also reproduced from a watercolour. The watercolours are by Zacha-rias Heinesen.
The 200-krone banknote measures 145 x 72 mm and its primary col-our
is dusty violet.
200 kroner – a new denomination
The introduction of this new denomination in the Faroese banknote
series is a natural consequence of the Act on Faroese Banknotes etc.,
which e.g. states that Faroese banknotes shall have the same sizes and
denominations as Danish banknotes. The wish to be able to settle payments using as few banknotes and coins as possible was the background to introducing the Danish 200-krone banknote.
Security features
Like the 100-krone banknote, the 200-krone banknote has a holo-gram.
With the other security features –such as the watermark and the security
thread with colour change –it makes Faroese banknotes difficult to
counterfeit.
The new banknote series
The remaining two banknotes in the new series are expected to be issued within 1½ years.
Further information
A folder on the new banknote will be distributed to Faroese house-holds
from 20 January 2004. For further information, visit:
www.nationalbanken.dk, Notes and coins.
11 FEBRUARY 2004: COMMEMORATIVE COIN TO MARK THE WEDDING
OF HRH CROWN PRINCE FREDERIK AND MISS MARY DONALDSON ON 14
MAY 2004
A commemorative coin will be issued to mark thewedding of His Royal
Highness Crown Prince Frederik and Miss Mary Donaldson. This is in line
with the tradition to issue commemorative coins in connection with special events in the Royal Family.
The coin will be issued in a 20-krone and a 200-krone version. The 20krone coin will be of the same size and alloy as the ordinary 20-krone
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coin in circulation. It will be minted in an edition of 1.2 million coins.
The 200-krone coin will be 38 mm in diameter and will be minted in fine
silver in an edition of 125,000 coins.
The motif on the obverse of the coin is a profile of the Queen, identical to the one used on the most recent 10- and 20-krone coins. The reverse features a twin portrait of His Royal Highness Crown Prince Frederik and Miss Mary Donaldson. The wedding portrait was designed by
the sculptor Karin Lorentzen.
Both commemorative coins will be available from banks and coin dealers from 10 May 2004.
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Tables
Interest rates and share-price index ......................................................... 1
Selected items from the Nationalbank's balance sheet .......................... 2
Factors affecting the banks' and the mortgage-credit
institutes' net position with the Nationalbank........................................ 3
Selected items from the consolidated balance sheet of the MFI sector
and the money stock.................................................................................. 4
The banks' lending..................................................................................... 5
Selected items from the balance sheet of
the mortgage-credit institutes .................................................................. 6
Principal items of the balance of payments (net revenues).................... 7
External financial payments (net payments from abroad) ..................... 8
Denmark's international investment position ......................................... 9
GDP by type of expenditure...................................................................... 10
Development in consumer prices and net retail prices ........................... 11
Selected monthly economic indicators ..................................................... 12
Selected quarterly economic indicators ................................................... 13
Exchange rates .......................................................................................... 14
Danmarks Nationalbank's Statistical Publications
Symbols and Sources
0 Magnitude nil or less than one half of unit employed.
… Data not available or of negligible interest.
Some of the most recent statistics may be provisional. Due to roundingoff there may be small differences between the sum of the individual
figures and the totals stated.
Date of going to press: 26 March 2004.
The Tables section of this publication is thus based on more recent information than the equivalent section of the Danish edition.
Danmarks Nationalbank is the source for Tables 1-6, 8-9 and 14, while
the Copenhagen Stock Exchange is the source for series of bond yields
and the share-price index in Table 1. Statistics Denmark is the source for
Tables 7 and 10-13. The calculations in Table 11 have been made by Danmarks Nationalbank.
INTEREST RATES AND SHARE-PRICE INDEX
Table 1
The Nationalbank's The ECB's
minimum
interest rates
bid rate
(in the
main
Lending
refinancand
ing
certifiDiscount cates of operations)
deposit
rate
Effective
end-of-year/
from
1999
2000
2001
2002
2003
...............
...............
...............
...............
...............
Per cent per annum
The
Copenhagen
Stock
30-year Exchange
sharemortprice
gageindex
credit
KFX
bond
Bond yields
Inter-bank
interest 10-year
rate,
central3-months governuncollatment
eralized
bond
End of period
Per cent per annum
3.7.89
=100
3.00
4.75
3.25
2.75
2.00
3.30
5.40
3.60
2.95
2.15
3.00
4.75
3.25
2.75
2.00
1999 .............
2000 .............
2001 .............
2002 .............
2003 .............
3.57
5.33
3.54
3.00
2.16
5.64
5.20
5.15
4.45
4.46
7.45
7.30
6.55
5.47
5.45
255.69
313.90
272.45
199.49
244.35
2002
6 Dec. ... 2.75
2.95
2.75
2003 Feb .....
2.65
4.17
5.32
178.03
2003
7 Mar. .. 2.50
23 May.... 2.50
6 Jun. .... 2.00
2.70
2.65
2.15
2.50
2.50
2.00
Sep .....
Oct .....
Nov ....
Dec.....
2.13
2.16
2.19
2.16
4.22
4.51
4.62
4.46
5.43
5.58
5.61
5.45
238.19
258.01
242.72
244.35
2004 26 Mar. .. 2.00
2.15
2.00
2004 Jan .....
Feb .....
2.16
2.11
4.41
4.22
5.39
5.23
261.83
275.94
SELECTED ITEMS FROM THE NATIONALBANK'S BALANCE SHEET
Table 2
The banks' and the mortgage-credit
The
institutes' net position with the
central
Nationalbank
governThe
ment's
foreign- Notes and account
exchange coin in with the Certifi- Deposits
reserve
circula- National- cates of (current
Total net
tion
(net)
Loans
position
deposit account)
bank
End of period
1999
2000
2001
2002
2003
Kr. billion
...............................
...............................
...............................
...............................
...............................
165.3
117.5
148.4
193.2
224.2
46.4
44.8
47.3
47.7
49.7
39.7
37.7
43.5
50.3
44.0
99.9
51.9
113.6
160.7
157.3
6.5
8.1
3.7
10.1
12.9
33.1
25.3
63.4
81.2
48.0
73.3
34.6
53.9
89.6
122.2
2003 Feb .........................
196.9
44.7
76.1
133.0
3.6
72.2
64.4
Sep .........................
Oct .........................
Nov.........................
Dec .........................
227.8
228.5
228.2
224.0
46.3
46.5
47.1
49.7
89.4
84.3
52.7
40.9
132.8
142.7
150.6
157.3
13.0
3.9
6.9
12.9
63.5
59.4
42.1
48.0
82.3
87.2
115.4
122.1
2004 Jan..........................
Feb .........................
214.6
206.4
47.2
46.7
56.9
54.5
131.1
139.0
4.7
3.3
39.4
51.7
96.5
90.7
FACTORS AFFECTING THE BANKS' AND THE MORTGAGE-CREDIT
INSTITUTES' NET POSITION WITH THE NATIONALBANK
Table 3
The banks' and the
mortgage-credit
institutes' net
position with the
Nationalbank
Central-government finance
Net
purchase
The
of
Sales of
foreign NationalDomestic domestic
exchange bank's
gross
centralnet
by the
financing governChange in
Other
End of
Liquidity National- bond
requirenet
ment
bank purchases factors position period
ment securities effect
Kr. billion
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
67.9
62.3
81.2
115.5
99.7
68.8
65.7
87.7
121.9
94.1
-0.9
-3.4
-6.5
-6.4
5.6
62.7
-37.7
28.4
45.4
31.0
1.9
2.1
1.0
-0.9
-0.1
-7.9
0.4
-3.6
-2.4
-4.0
55.7
-38.7
19.3
35.7
32.5
73.3
34.6
53.9
89.6
122.2
2003 Feb ............
-4.8
5.9
-10.7
2.3
0.2
-0.1
-8.4
64.4
Sep ............
Oct.............
Nov............
Dec ............
8.5
13.4
23.6
11.7
9.4
8.3
-8.1
4.5
-1.0
5.1
31.6
7.3
0.0
0.7
-0.3
0.3
1.0
-0.2
-1.3
0.3
0.6
-0.7
-1.8
-1.2
0.6
4.9
28.2
6.7
82.3
87.2
115.4
122.1
2004 Jan.............
Feb ............
0.6
2.5
16.6
1.0
-16.0
1.5
-9.6
-7.3
-2.0
0.0
1.9
0.0
-25.7
-5.8
96.5
90.7
SELECTED ITEMS FROM THE CONSOLIDATED BALANCE SHEET OF
THE MFI SECTOR AND THE MONEY STOCK
Table 4
of which:
Domestic lending
of which:
Total
balance
Total
Households
End of period
1999
2000
2001
2002
2003
Holdings of
domestic
securities
Nonfinancial other than
shares
companies
Foreign
assets,
1
net
Money
stock
(M3)
Kr. billion
..................
..................
..................
..................
..................
2,612.8
2,806.8
2,932.1
3,201.5
3,358.9
1,578.2
1,758.7
1,925.9
2,024.5
2,151.6
1,001.8
1,076.8
1,168.6
1,249.3
1,351.7
420.0
499.2
573.2
578.3
607.5
125.8
114.2
133.1
142.8
123.3
163.7
49.6
-46.9
-63.9
-53.7
523.2
506.4
546.4
604.7
690.8
2003 Feb ............
3,311.9
2,044.9
1,261.0
587.4
154.0
-47.0
670.4
Sep ............
Oct ............
Nov............
Dec ............
3,445.3
3,383.6
3,312.2
3,358.9
2,125.9
2,120.5
2,129.7
2,151.6
1,327.5
1,328.9
1,333.7
1,351.7
602.0
594.0
598.2
607.5
157.5
151.8
122.1
123.3
-26.4
-55.6
-64.8
-53.7
687.2
729.2
729.8
690.8
2004 Jan ............
Feb ............
3,347.1
3,369.3
2,159.7
2,165.6
1,355.2
1,358.2
602.5
608.7
126.5
124.1
-55.6
-68.4
769.2
701.4
Change compared with previous year, per cent
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
8.5
7.4
4.5
9.2
4.9
5.8
11.4
9.5
5.1
6.3
7.8
7.5
8.5
6.8
8.2
2.9
18.9
14.8
0.9
5.1
-17.9
-9.2
16.5
7.3
-13.7
…
…
…
…
…
0.0
-3.2
7.9
10.7
14.2
2003 Feb ............
9.1
5.6
7.8
1.5
7.5
…
21.0
Sep ............
Oct ............
Nov............
Dec ............
6.6
5.2
3.2
4.9
5.8
5.7
5.7
6.3
7.6
7.5
7.9
8.2
3.5
3.6
3.0
5.1
-3.4
-0.5
-12.5
-13.7
…
…
…
…
16.2
20.6
20.7
14.2
2004 Jan ............
Feb ............
1.9
1.7
6.3
5.9
8.5
7.7
3.1
3.6
-15.6
-19.4
…
…
17.1
4.6
Note: The MFI sector includes Danish Monetary Financial Institutions, i.e. banks and mortgage-credit institutes, other
credit institutions, money-market funds and Danmarks Nationalbank.
1
The net foreign assets of the MFI sector has been compiled as the difference between all assets and liabilities vis-a-vis
non-residents.
THE BANKS LENDING
Table 5
From Danish owned banks
abroad
From banks in Denmark
of which:
To
Danish
residents
total
Households
NonTo
nonfinancial
Danish
companies residents
End of period
1999
2000
2001
2002
2003
of which:
Total
To
Danish
residents
To
nonDanish
residents
Total
lending
Kr. billion
..................
..................
..................
..................
..................
399.8
526.2
588.0
599.2
662.9
203.4
239.0
253.3
253.5
271.5
117.2
186.4
228.8
231.3
285.7
105.0
104.7
112.7
124.5
129.4
345.4
312.5
288.1
298.3
323.1
123.2
66.2
34.6
32.6
30.2
222.1
246.3
253.5
265.7
292.9
850.2
943.4
988.8
1,022.0
1,115.4
2003 Feb ............
640.4
244.3
279.6
152.0
…
…
…
…
Sep ............
Oct ............
Nov............
Dec ............
656.8
645.1
647.3
662.9
261.3
258.2
256.8
271.5
282.8
273.1
277.1
285.7
137.5
124.2
118.9
129.4
326.8
…
…
323.1
30.0
…
…
30.2
296.8
…
…
292.9
1,121.1
…
…
1,115.4
2004 Jan ............
Feb ............
661.5
657.6
265.3
266.2
279.8
280.0
132.9
129.7
…
…
…
…
…
…
…
…
Change compared with previous year, per cent
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
5.5
31.6
11.7
1.9
10.6
4.5
17.6
6.0
0.1
7.0
4.2
59.0
22.7
1.1
23.5
40.4
-0.3
7.6
10.5
3.9
39.2
-9.5
-7.8
3.5
8.3
27.8
-46.3
-47.7
-5.8
-7.4
46.4
10.9
2.9
4.8
10.2
21.1
11.0
4.8
3.4
9.1
2003 Feb ............
9.5
-0.4
20.9
17.9
…
…
…
…
Sep ............
Oct ............
Nov............
Dec ............
9.8
9.5
9.8
10.6
2.4
2.8
5.5
7.0
22.5
22.4
20.2
23.5
-1.3
-15.3
-6.5
3.9
15.2
…
…
8.3
-2.6
…
…
-7.4
17.4
…
…
10.2
9.8
…
…
9.1
2004 Jan ............
Feb ............
2.5
2.7
8.0
8.9
-0.4
0.2
-9.7
-14.7
…
…
…
…
…
…
…
…
Note: As from 2003 the banks' lending is affected by the inclusion of an institution previously belonging to the category
"Other Credit Institutions". Lending to households includes lending to self-employed individuals.
SELECTED ITEMS FROM THE BALANCE SHEET OF
THE MORTGAGE-CREDIT INSTITUTES
Table 6
of which:
1
Domestic lending
Total
balance
Total
End of period
1999
2000
2001
2002
2003
of which:
Lending to
house2
holds
of which:
Interest
adjusted
lending
of which:
Lending in
foreign
currency
Debt
securities
issued
Kr. billion
..................
..................
..................
..................
..................
1,222.9
1,341.1
1,579.5
1,721.8
1,863.8
1,050.9
1,095.4
1,191.8
1,284.6
1,393.5
785.8
830.2
907.6
988.0
1,072.1
59.7
99.8
245.7
365.0
499.1
9.6
15.5
54.5
82.5
85.7
1,116.2
1,212.9
1,421.3
1,584.2
1,729.0
2003 Feb ............
1,564.8
1,311.0
1,009.0
385.5
84.8
1,482.1
Sep ............
Oct ............
Nov............
Dec ............
1,642.3
1,579.0
1,606.4
1,863.8
1,374.3
1,380.5
1,388.2
1,393.5
1,058.9
1,063.3
1,069.5
1,072.1
452.3
462.9
476.1
499.1
90.3
89.1
88.9
85.7
1,533.2
1,467.5
1,491.2
1,729.0
2004 Jan ............
Feb ............
1,571.2
1,599.5
1,402.1
1,412.3
1,081.8
1,084.0
516.9
532.0
85.4
85.3
1,488.3
1,520.2
Change compared with previous year, per cent
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
4.3
9.7
17.8
9.0
8.2
6.4
4.2
8.8
7.8
8.5
7.5
5.7
9.3
8.9
8.5
…
67.2
146.2
48.6
36.7
…
61.5
251.6
51.4
3.9
-0.6
8.7
17.2
11.5
9.1
2003 Feb ............
14.1
9.0
10.1
38.5
27.3
17.5
Sep ............
Oct ............
Nov............
Dec ............
11.7
8.5
7.6
8.2
8.4
8.2
8.0
8.5
8.9
8.6
8.4
8.5
35.4
35.0
35.4
36.7
12.6
9.9
8.5
3.9
11.9
7.1
6.5
9.1
2004 Jan ............
Feb ............
4.5
2.2
8.2
7.7
8.6
7.4
37.9
38.0
1.9
0.6
4.4
2.6
1
2
The distribution of lending to households, interest adjusted lending and lending in foreign currency may coincide.
Therefore, some lending has been included in more than more than one of the above categories.
Lending to households includes lending to self-employed individuals.
PRINCIPAL ITEMS OF THE BALANCE OF PAYMENTS (NET REVENUES)
Goods
(fob)
Services
Goods and
services
Wages and
property
income
Table 7
Current
transfers
Total
current
account
Kr. billion
1999
2000
2001
2002
2003
...............................
...............................
...............................
...............................
...............................
46.7
54.1
61.7
60.1
67.7
11.1
22.1
23.8
16.8
24.0
57.8
76.2
85.5
76.9
91.7
-17.4
-32.8
-24.8
-27.2
-25.3
-19.3
-24.8
-20.3
-22.1
-24.2
21.2
18.6
40.5
27.6
42.3
Feb 02 - Jan 03 ................
59.9
16.0
75.8
-26.9
-22.2
26.7
Feb 03 - Jan 04 ................
66.6
25.1
91.6
-25.0
-23.9
42.7
2003 Jan..........................
4.0
-0.1
4.0
-2.6
1.6
2.9
Aug ........................
Sep .........................
Oct..........................
Nov.........................
Dec .........................
6.1
9.1
5.0
5.2
3.9
2.7
2.5
3.5
2.3
3.1
8.8
11.6
8.5
7.5
7.0
-1.5
-1.2
-2.3
-4.6
-2.9
-2.2
-2.4
-2.4
-1.7
-2.4
5.2
8.0
3.7
1.2
1.7
2004 Jan..........................
2.9
0.9
3.8
-2.4
1.9
3.3
EXTERNAL FINANCIAL PAYMENTS (NET PAYMENTS FROM ABROAD)
Table 8
Financial payments
of which:
Direct investments
Current Capital
payments transfers
Total
Foreign
in
Denmark
Danish
abroad
Danish
kroneErrors
denomiand
nated
bonds omissions
Increase
in the
foreignexchange
reserve
Kr. billion
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
21.2
18.6
40.5
27.6
42.3
0.9
-0.1
-0.2
0.7
-0.3
61.4
-18.0
-44.5
29.0
-37.4
116.9
266.9
92.5
52.4
17.9
-118.6
-202.7
-107.9
-44.6
-8.6
15.3
-21.3
-17.7
8.5
-32.7
-19.3
-43.6
31.7
-11.8
26.1
64.2
-43.0
27.5
45.4
30.8
Mar 02 - Feb 03..
28.6
0.6
-8.7
48.7
-46.1
26.1
5.8
26.4
Mar 03 - Feb 04..
…
-0.4
-72.4
19.1
-1.6
-64.2
…
9.4
2003 Feb ............
4.4
-0.2
-8.2
0.8
-7.8
8.0
5.6
1.7
Sep ............
Oct ............
Nov............
Dec ............
8.0
3.7
1.2
1.7
0.0
0.1
0.1
-0.2
-4.3
-15.3
-4.7
-6.6
1.3
-0.7
0.9
1.0
0.5
0.1
2.2
2.0
17.3
-35.5
-16.6
17.0
-5.9
12.3
3.2
0.8
-2.2
0.7
-0.3
-4.3
2004 Jan ............
Feb ............
3.3
…
-0.3
-0.1
-30.3
-24.3
6.2
-1.3
0.1
-3.1
-2.9
-17.8
17.8
…
-9.4
-8.2
DENMARK'S INTERNATIONAL INVESTMENT POSITION
Direct
investment
Portfolio
investment
In
Shares,
Abroad Denmark
etc.
Bonds,
etc.
Table 9
Other
investment
Loans,
currency
and
Trade
credits deposits
Other
The
foreign
exchange
reserve
Total
Kr. billion
End of period
Assets
1999 ..............
2000 ...............
2001 ..............
2002 ..............
2003 ..............
358
557
624
571
581
22
29
35
30
30
387
454
403
254
301
151
229
317
359
454
48
51
57
57
57
457
472
417
451
519
98
143
124
249
181
225
121
152
197
228
1,747
2,056
2,131
2,167
2,350
2003 Q1 ........
Q2 ........
Q3 ........
Q4 ........
578
584
584
581
30
30
30
30
226
246
273
301
414
431
414
454
57
57
57
57
549
570
519
519
222
267
268
181
202
240
234
228
2,278
2,425
2,380
2,350
1999 ..............
2000 ...............
2001 ..............
2002 ..............
2003 ..............
19
26
33
33
33
333
564
601
551
575
160
218
201
146
189
611
646
754
763
777
24
24
30
30
30
621
672
631
668
814
73
120
106
214
139
58
3
4
4
3
1,899
2,274
2,359
2,408
2,560
2003 Q1 ........
Q2 ........
Q3 ........
Q4 ........
33
33
33
33
553
567
572
575
144
164
180
189
821
828
830
777
30
30
30
30
772
823
761
814
181
225
229
139
1
3
3
3
2,535
2,672
2,636
2,560
1999 ..............
2000 ...............
2001 ..............
2002 ..............
2003 ..............
338
531
591
538
548
-311
-535
-567
-521
-545
227
236
203
107
112
-459
-418
-436
-404
-323
25
27
27
27
27
-164
-199
-214
-217
-295
25
23
19
36
42
167
117
148
193
224
-152
-218
-229
-241
-210
2003 Q1
Q2
Q3
Q4
546
551
552
548
-522
-537
-542
-545
82
82
93
112
-407
-397
-416
-323
27
27
27
27
-223
-253
-242
-295
41
42
40
42
202
237
231
224
-257
-247
-256
-210
Liabilities
Net assets
........
........
........
........
Note: As a key principle, the market value has been used for the compilation.
GDP BY TYPE OF EXPENDITURE
Table 10
Final domestic demand
GDP
GeneralgovernGross
fixed Change in
ment
Private
inventconsump- consump- capital
tion
formation ories
tion
Total
Exports Imports
of goods of goods
and
and
services services
Kr. billion
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
1,207.7
1,279.0
1,325.5
1,360.7
1,391.0
599.5
610.5
624.5
641.9
661.0
312.1
323.4
343.3
358.5
370.9
240.9
258.1
271.0
282.7
271.5
-2.6
10.9
1.3
0.7
-1.2
1,149.9
1,202.8
1,240.0
1,283.8
1,302.3
459.6
563.4
591.5
602.7
606.5
401.8
487.2
506.0
525.8
517.8
2002 Q4 ............
354.3
167.6
92.2
73.4
-2.0
331.2
156.2
133.0
2003 Q1
Q2
Q3
Q4
336.3
347.4
343.7
363.6
162.4
163.7
161.7
173.3
89.7
93.0
92.8
95.5
64.2
67.2
66.2
73.9
1.6
2.0
-3.0
-1.8
317.9
325.9
317.6
340.9
149.6
147.0
152.4
157.5
131.1
125.5
126.3
134.8
............
............
............
............
Real growth compared with previous year, per cent
1999
2000
2001
2002
2003
..................
..................
..................
..................
..................
2.6
2.8
1.6
1.0
0.0
0.7
-0.7
-0.2
0.6
1.1
2.0
0.9
2.7
2.1
1.2
1.5
6.9
4.9
4.5
-2.9
…
…
…
…
…
0.1
2.4
1.0
1.9
0.1
12.3
13.5
4.4
4.8
0.1
5.5
13.5
3.5
7.3
0.4
2002 Q4 ............
0.4
1.7
1.6
0.5
…
0.7
4.5
1.4
-1.2
-0.4
0.3
0.5
0.3
1.3
2.4
2.8
1.3
0.1
0.7
-2.7
-7.1
-1.9
0.1
…
…
…
…
1.3
-1.5
-0.8
1.5
4.2
-2.3
-1.2
-0.1
5.7
4.3
2003 Q1
Q2
Q3
Q4
............
............
............
............
-3.1
-2.1
2.5
Real growth compared with previous quarter (seasonally adjusted),
per cent
2002 Q4 ............
-0.3
1.3
-0.1
-0.4
…
-0.5
-0.8
-1.9
2003 Q1
Q2
Q3
Q4
0.5
-0.5
-0.1
0.3
-0.3
0.0
0.6
1.8
0.6
0.2
-0.5
0.5
-3.8
-0.7
4.0
0.6
…
…
…
…
0.5
-0.5
0.2
1.2
0.4
-0.6
-0.3
0.6
0.6
-1.7
0.8
3.0
............
............
............
............
DEVELOPMENT IN CONSUMER PRICES AND NET RETAIL PRICES
Index of
net
Consumer-price retail
prices Energy Imports Total
index
Table 11
Domestic prices
Food
stuffs
Rent
Public
services
IMI
0.232
0.034
0.370
Weights
HICP
CPI
1.000
0.080
0.157
0.764
0.128
Year-on-year growth, per cent
1999
2000
2001
2002
2003
...................
...................
...................
...................
...................
2.1
2.7
2.3
2.4
2.0
2.5
2.9
2.4
2.4
2.1
2.1
3.1
2.4
2.5
2.3
2.1
19.5
-0.9
0.9
1.6
-0.3
4.3
2.4
0.4
0.4
2.5
1.7
2.7
3.0
2.6
0.6
2.4
3.4
2.0
1.8
2.7
3.1
3.0
2.9
2.7
3.5
3.7
3.3
4.5
7.9
2.9
0.1
2.1
3.2
2.2
2001 Q1 ..............
Q2 ..............
Q3 ..............
Q4 ..............
2.3
2.5
2.3
2.0
2.4
2.6
2.4
2.1
2.5
2.7
2.4
2.0
2.2
2.4
-1.3
-6.5
4.6
2.8
1.9
0.6
2.2
2.8
2.9
3.1
2.8
4.0
3.7
3.1
2.9
3.0
3.0
3.0
3.3
2.4
3.5
3.8
1.2
2.1
2.2
2.9
2002 Q1 ..............
Q2 ..............
Q3 ..............
Q4 ..............
2.5
2.1
2.4
2.7
2.5
2.3
2.3
2.6
2.7
2.3
2.5
2.6
-0.7
-0.3
-0.2
5.1
0.1
0.5
0.5
0.8
3.4
2.8
3.0
2.7
3.4
1.6
1.4
1.5
3.1
3.1
2.8
2.6
3.9
4.5
4.2
5.1
3.6
2.9
3.6
2.9
2003 Q1 ..............
Q2 ..............
Q3 ..............
Q4 ..............
2.8
2.2
1.6
1.3
2.8
2.3
1.8
1.5
2.8
2.4
2.0
1.9
10.6
-0.4
-1.0
-2.4
1.3
0.8
0.0
-0.6
2.4
2.9
2.5
2.7
1.6
1.7
1.8
2.2
2.7
2.7
2.7
2.7
8.1
8.6
8.3
6.8
1.8
2.7
1.9
2.3
Note: Weighting basis of December 2002.
The index of net retail prices is the consumer price index adjusted for indirect taxes, duties and subsidies for
general price reductions.
"IMI" is a measure of domestic market-determined inflation. "IMI" is normally larger than the increase in the
index of net retail prices due to an overweight of services, for which the price development is typically stronger
than for other commodities.
HICP is the Harmonised Index of Consumer Prices.
SELECTED MONTHLY ECONOMIC INDICATORS
Table 12
Quantitative index
for sales in sectors
of
Composite cyclical
indicator for
Extraction of
ConNew
raw
Unempassen- sumer
Building
Forced
ployment materials
configer car
and
sales of
and
Bank- registra- dence
construcreal
manufac- Retail property ruptcies tions indicator Industry
tion
Per cent
turing
trade
of labour
force 2000=100 2000=100
Number
Balance per cent
1999 ...............
2000 ...............
2001................
2002 ...............
2003 ...............
5.7
5.4
5.2
5.2
6.1
95
100
102
103
102
99.3
100.0
100.6
103.9
107.8
2,397
2,584
2,682
3,041
3,039
1,636 144,259
1,771 113,634
2,329 96,114
2,469 111,598
2,506 96,501
-2
2
0
1
1
-11
5
-3
-4
-6
-8
-1
-11
-14
-18
Seasonally adjusted
2003 Feb ........
5.7
105
107.4
213
205
8,048
-2
-5
-21
Sep ........
Oct ........
Nov........
Dec ........
6.3
6.4
6.5
6.6
103
103
102
99
106.8
110.1
109.0
107.6
282
288
259
210
194
228
213
234
8,391
8,398
9,169
8,897
-2
3
3
2
-5
-4
8
1
-16
-15
-13
-15
2004 Jan.........
Feb ........
6.5
…
102
…
…
…
240
238
204
210
9,246
8,194
3
2
1
5
-15
-13
SELECTED QUARTERLY ECONOMIC INDICATORS
Table 13
Employment
Total
Private
1,000 persons
1999
2000
2001
2002
2003
........................
........................
........................
........................
........................
2,716
2,734
2,750
2,740
2,705
1,896
1,912
1,920
1,901
1,866
Hourly
earnings
in manufacturing industry
Real
effective
krone rate
based on
hourly
earnings
Feb. 1996 =100
1980=100
114.4
118.4
123.5
128.5
133.8
Property prices
(purchase sum,
one-family
dwellings)
As a percentage of
property
value 1995
102.7
98.6
101.2
103.3
108.2
143.7
153.0
162.0
168.1
…
Seasonally adjusted
2002 Q4 ................
2,729
1,892
130.7
104.6
169.3
2003 Q1
Q2
Q3
Q4
2,709
2,704
2,699
2,705
1,867
1,866
1,861
1,866
132.2
132.8
134.4
135.9
106.5
108.1
108.7
109.4
169.9
173.3
174.7
…
................
................
................
................
Change compared with previous year, per cent
1999
2000
2001
2002
2003
........................
........................
........................
........................
........................
1.3
0.7
0.6
-0.4
-1.3
1.5
0.9
0.4
-1.0
-1.8
4.1
3.5
4.3
4.0
4.2
-0.4
-4.0
2.6
2.0
4.7
6.9
6.5
5.9
3.8
…
2002 Q4 ................
-0.9
-1.4
4.3
2.3
4.2
2003 Q1
Q2
Q3
Q4
-1.3
-1.7
-1.3
-0.9
-1.8
-2.4
-1.8
-1.4
4.4
4.0
4.3
4.0
4.4
5.3
4.6
4.6
3.0
3.0
3.2
…
................
................
................
................
EXCHANGE RATES
Table 14
EUR
USD
GBP
SEK
Kroner per 100 units
Effective
krone
rate
Real
effective
krone rate
based on
consumer
prices
1980=100
Average
..............
..............
..............
..............
..............
743.56
745.37
745.21
743.04
743.07
698.34
809.03
831.88
788.12
658.99
1,129.49
1,223.33
1,197.74
1,182.10
1,074.99
84.46
88.26
80.58
81.12
81.45
99.6
95.6
96.9
97.7
101.2
104.3
100.6
101.8
103.5
107.5
2003 Feb .........
743.17
689.86
1,109.81
81.26
100.1
106.4
Sep .........
Oct .........
Nov.........
Dec .........
742.73
743.01
743.70
744.17
662.17
635.51
635.69
607.03
1,065.77
1,065.15
1,073.59
1,060.36
81.91
82.46
82.69
82.54
101.2
101.5
101.4
102.2
107.6
107.5
107.6
108.2
2004 Jan..........
Feb .........
744.81
745.11
590.55
589.25
1,076.15
1,100.85
81.52
81.20
102.6
102.6
108.4
…
1999
2000
2001
2002
2003
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