Heavily-indebted Danes: Zero interest rates risk financial instability

Denmark enjoys some of the world's highest standards of living, however, it also suffers from the highest levels of household debt in the developed world, due to staggeringly high levels of mortgage debt. Denmark adopted negative monetary policy nearly four years ago in a bid to keep its currency in line with the struggling euro, a move that has encouraged investors to trade non-interest paying bank accounts for property investments. However, the Danish central bank has now warned that the ratio of household debt to disposable income is "unsustainable" and there are real concerns that there may be a repeat of the Danish housing market freeze that followed the 2008 financial crisis.

Everybody loves Denmark. And there’s lots to love.

Denmark is super rich.

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And at the same time, it’s super egalitarian.

But, here’s something you probably didn’t know. Danes have a lot of debt. Actually, the most debt.

What’s the deal? Basically, Denmark has sky high levels of mortgage debt. Is that a bad thing? Well, maybe.

One the one hand, most debt in Denmark is floating rate, which means with interest rates this low, debt is super affordable. Also, debt is only one part of the household balance sheet, the other part is assets. And Danes have a lot of assets, mostly in the form of illiquid pensions.

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In fact, the sustainability of Denmark’s high levels of household debt is only possible because of the quasi-obligatory pensions schemes that most people contribute to. All that money is pooled up, and used to buy things like Danish mortgage bonds.

Maybe Denmark has too much finance

On the other hand, Denmark’s finance sector could prove to be something of a problem for economic growth, according to some who posit that too much finance can add to boom and bust cycles in economies and elbow out “real” economic growth. If they’re right, Denmark would do well to shrink its finance sector.