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It's The Euro Wot Done It - Denmark Pays Off All Foreign Debt

This article is more than 7 years old.

Well, more accurately, Denmark's government, the central bank, has paid off all foreign debt. And this is all down to the effects of the euro, nothing else. Which we might take to be good news, at least someone is benefiting from the system given that places like Greece so obviously aren't. But in fact there's no great benefit here at all, it's purely a technical side effects of the manner in which the krone is pegged to the euro.

Still, if you like a country to have no foreign debt then this is a cause for celebration:

The country will pay off its last foreign currency loan worth $1.5bn today – ridding itself of any FX debt obligations for the first time in at least 183 years.

Data from the Danish central bank shows the last time the central government was near paying off all its foreign currency loans was back in 1894 – when FX debt totaled less than 1 per cent of GDP. The country first raised its foreign debt in 1757 when it issued a loan worth half a million rigsdaler from Germany and the Netherlands.

This is not though because the place has come over all nationalist nor even because it has become a centre, a shining example even, of fiscal rectitude. Nope, it's purely the euro:

Historically, Denmark has raised foreign currency debt to bulk up its FX reserves but vast amounts of currency intervention in recent years – designed to keep a lid on its krone peg with the euro – led Danish FX reserves to hit an all-time record back in 2015

Denmark isn't in the euro and the citizenry have rejected the idea that it should be. The government however rather likes it so, to gain at least some of the benefits they think would come with membership, they pegged the value of the krone to that of the euro. Most people out there think the krone should be rather more valuable than that pegged value so they keep buying it. That should disrupt the peg of course. But to stop that happening it's the Danish central bank which sells as many krone as people want to buy. They can, by expanding the volume keep the price static of course.

But, if you're selling krone to all and sundry then of course you're collecting all that lovely foreign currency they're using to pay for it. And given the volumes of those krone sales the foreign currency is quite piling up in the central bank's coffers. At which point why bother trying to borrow foreign currency when you've got all you want already stored in the cellar?

Thus the Danes paying off all those foreign borrowings is just a side effect of the peg of the krone to the euro. Nothing at all to do with anything else.