Denmark’s biggest investor, pension fund ATP, says it hasn’t bothered setting up a hedge to protect its assets if the krone’s peg to the euro should break because the scenario is too far-fetched to warrant such a move.
The fund, which oversees about $110 billion in assets, says it makes no financial sense to bet against Denmark’s currency regime, which has existed for three decades, has the full support of parliament and is backed by the European Central Bank.
“We have full confidence in the central bank’s ability to maintain the peg,” Carsten Stendevad, chief executive officer at ATP, said in an interview in Copenhagen. “The central bank has ample ammunition and we’re very comfortable with the situation.”
Governor Lars Rohde, who was CEO of ATP before Stendevad took over in 2013, has resorted to extreme measures to fight back a capital influx that threatens to strengthen the krone beyond the confines of its peg. After four cuts this year, Denmark’s deposit rate is minus 0.75 percent. The central bank has also suspended government bond sales and sold a record amount of kroner to weaken the currency.
Speculation by offshore investors that Denmark’s euro peg may not survive has gained traction since the Swiss National Bank on Jan. 15 abandoned its ties to the single currency. Since then, the central bank in Copenhagen has been caught off guard by the flows into Denmark’s AAA-rated assets, according to Nordea Bank AB.
‘Unusual Situation’
Inside Denmark, the notion the peg might collapse isn’t taken seriously by any of the country’s major banks or institutional investors.
“The current situation in the market has not changed our firm conviction in the peg. The percentage of our assets in Danish kroner is lower today than at the end of the year and it was lower at the end of the year than it was a year ago,” Stendevad said. “I think that shows our full confidence and conviction that the peg is as safe as ever.”
ATP is “able to deal with” the suspension of Danish sovereign bond sales, Stendevad said.
It’s “clearly an unusual situation,” he said. “I think the central bank is right to take unconventional methods to defend the peg.”
‘No Limit’
Rohde said in an interview today the central bank won’t rule out the direct purchase of government or even mortgage bonds to drive down longer-dated yields. There is “no limit” to how big the balance sheet of the central bank can grow, and Rohde is ready to do “whatever it takes” to defend the peg. Abandoning it would be “unthinkable,” he said.
Denmark’s foreign reserves are now equivalent to about 30 percent of gross domestic product. In Switzerland, reserves grew as high as 80 percent of GDP at their peak, according to estimates provided by Nykredit A/S and SEB AB.
Denmark rejected euro membership in a 2000 referendum. Its central bank has since defended the krone’s peg to the euro, and before that to the deutschmark, starting in 1982.
