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Denmark mulls foreign debt as funding needs hit USD 37 Billion

Denmark may issue securities in foreign currencies for the first time in years as the government debt office pulls out the stops to finance programs to support the economy through the coronavirus crisis.

Photo: Jens Dresling

Denmark may issue securities in foreign currencies for the first time in years as the government debt office pulls out the stops to finance programs to support the economy through the coronavirus crisis.

While issuing in Danish kroner is the preferred option, Denmark is “one of the few countries in the world with the highest credit rating” and therefore “in a favorable position when it comes to obtaining attractive financing conditions in the international debt capital market,” the debt office said in a fresh analysis published by the central bank on Wednesday.

Denmark paid off its last foreign currency loans in 2017. But now, the government needs 250 billion kroner (USD 37 billion) between April and the end of July to help pay for the economic fallout of Covid-19, the bank said. The new financing need, which is “‘subject to great uncertainty,” is about 200 billion kroner more than previously predicted, it said.

Foreign currency loans have historically been used only to build up foreign currency reserves, thereby supporting the krone’s peg to the euro. Their use to finance government programs highlights the unusual situation in which Denmark finds itself as one of the few countries without a quantitative easing program.

“Denmark is hit by the fact that they don’t do QE, and in that case this is the logical step to take to expand to other types of investors,” Jan Storup Nielsen, chief analyst at Nordea, said. “This shows that they’re opening all channels to increase financing, even programs that have been closed for a long time.”

The analysis also said T-bill issuance probably will be increased “significantly” beyond a 2020 target of 30 billion kroner, and the debt office may also offer commercial paper and European medium-term notes. At 130 billion kroner, the government’s account at the central bank also could be a source for a “significant part” of the funding.

“The distribution between the various funding sources will partly depend on investor demand,” the central bank said. Already last month, the debt office increased its 2020 bond sale target by 50 billion kroner to help cover the cost of government stimulus.

Troels Kromand Danielsen, chief economist at Nykredit Bank, said bond and T-bill issuance are both likely to increase, due to the nature of the various support programs.

“Many of the immediate aid packages” are likely to be funded with T-bills because “the short-term nature of the aid matches the duration of the bills,” Danielsen said. “Later this year, when the government rolls out bigger stimulus plans for the economy, that may be financed with longer-term bonds.”

The debt office must be flexible about funding strategies given the increased need and uncertainty in the global financial markets, according to the analysis. “This also ensures that individual market segments are not burdened unnecessarily,” the report said.

Denmark’s government has pledged about 300 billion kroner in aid packages as the country enters a second month of lockdown to prevent the virus from spreading. On Wednesday, Prime Minister Mette Frederiksen started a partial roll-back. Still, she’s made clear that any uptick in case numbers will be followed by an instant return to tight restrictions.

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