My piece for FT AV can be found here:
FT Alphaville: What the Danish negative rate experience tells us.
My piece for FT AV can be found here:
FT Alphaville: What the Danish negative rate experience tells us.
I was going to do something on negative rates, but I’m busy and Nordea has written a good primer, and I still think me and Izzy’s post from July last year when they were introduced is pretty good.
Nordea: Denmark Update: Negative interest rates — the Danish experience
FT Alphaville: The ‘natural experiment’ of negative deposits rates in Denmark
St Louis Fed publication: How Low Can You Go? Negative Interest Rates and Investors’ Flight to Safety [hat tip to Toby Nangle]
I might do a little more tomorrow.
A Danish newspaper called Børsen takes the prize for the worst graph I’ve seen in a long time:
It’s a (sad) graph of the price action in Brøndby IF’s stock price (my football club). On the right hand side it’s the price in DKK. On the left hand side… well, I don’t know. I guess it’s the daily price action given the 13.82%-mark, but what about the other numbers? For the last couple of days, maybe? What a mess.
It also gives me a good reason to run one of my favorite xkcd of all time:
The Danish Government Borrowing and Debt, 2012 report is out of the central bank. Not much new in there, but there are a few good graphs worth reposting.
The next one is of bids and sales of government bonds at auctions. Can you spot when the euro crisis was in full swing?
Ownership structure of the domestic debt securities:
A quick comment to the strategy of issuing in euros (not much there):
The strategy for the central government’s foreign borrowing in 2013 is to raise a loan of 1-2 billion euro with final exposure in euro. The loan will be issued in the 2-5-year segment and denominated in euro or dollars. Foreign loans with a term to maturity of up to 1 year (Commercial Paper) will be issued to maintain investor interest and market access.
And, as previously mention, the central bank is to post collateral on swaps:
The current agreements with the central government’s swap counterparties entail pledging of one-way collateral for the market value of the swaps. Consequently, the counterparties pledge collateral when the market value of the swap portfolio is positive for the central government, while the government does not pledge collateral when the market value is positive for the counterparty.
In 2013, the central government will start negotiating new bilateral collateral agreements with cash as eligible collateral. The switch to two-way collateral agreements is expected to provide for more favourable terms for the central government when concluding new swaps. This reflects that two-way collateral agreements reduce the liquidity requirements of the counterparties compared with one-way collateral agreements. The negotiations with the counterparties on new bilateral collateral agreements are expected to be finalised during 2013.
He obviously hasn’t checked the academic research on this, so here’s a little help.
From Dahlberg et al:
Data from a US mortality follow-back survey were analyzed to determine whether having a firearm in the home increases the risk of a violent death in the home and whether risk varies by storage practice, type of gun, or number of guns in the home. Those persons with guns in the home were at greater risk than those without guns in the home of dying from a homicide in the home (adjusted odds ratio = 1.9, 95% confidence interval: 1.1, 3.4). They were also at greater risk of dying from a firearm homicide, but risk varied by age and whether the person was living with others at the time of death. The risk of dying from a suicide in the home was greater for males in homes with guns than for males without guns in the home (adjusted odds ratio = 10.4, 95% confidence interval: 5.8, 18.9). Persons with guns in the home were also more likely to have died from suicide committed with a firearm than from one committed by using a different method (adjusted odds ratio = 31.1, 95% confidence interval: 19.5, 49.6). Results show that regardless of storage practice, type of gun, or number of firearms in the home, having a gun in the home was associated with an increased risk of firearm homicide and firearm suicide in the home.
From Harvard Injury Control Research Center literature overview, this one on the homicide research (lots of links in there):
Our review of the academic literature found that a broad array of evidence indicates that gun availability is a risk factor for homicide, both in the United States and across high-income countries. Case-control studies, ecological time-series and cross-sectional studies indicate that in homes, cities, states and regions in the US, where there are more guns, both men and women are at higher risk for homicide, particularly firearm homicide.
And this one, again via Harvard, on accidents:
We analyzed data for 50 states over 19 years to investigate the relationship between gun prevalence and accidental gun deaths across different age groups. For every age group, where there are more guns there are more accidental deaths. The mortality rate was 7 times higher in the four states with the most guns compared to the four states with the fewest guns.
Here’s Ayres and Donohue with ‘More Guns, Less Crime Fails Again: The Latest Evidence from 1977 – 2006′:
In their reply to our comment on their initial paper, Moody and Marvell continue their analysis of right-to-carry (RTC) laws using panel data for the period 1977-2000. But with six additional years of data now available for analysis, we think the need for further parsing of older data is of limited value in assessing the more guns, less crime hypothesis. In this comment, we add six years of data to what Moody and Marvell previously analyzed. We show that, whether one looks at the original Lott and Mustard specification, the latest Moody and Marvell specification, or a plausible alternative specification, there is consistent evidence for the unsurprising proposition that RTC laws increase aggravated assault. We address some anomalies in these models and their resulting estimates. The Lott and Mustard model, for example, suffers from omitted-variable bias in failing to control for the impact of incarceration. In addition, the Moody and Marvell model generates odd predictions of the impact of incarceration on crime for most crime categories, and it appears to suggest (anomalously) that crack had no impact on murder. These and other problems raise questions about how well these regressions work to reveal the true effect on crime of RTC laws. For instance, would better data and models reveal that the estimated increases in murder and robbery are also statistically significant, as they are for the related violent crime of aggravated assault? Or might the estimated effect of aggravated assault be altered if we knew the full impact of changing police responses to domestic violence?
[And yeah, the usual caveats apply -- Denmark's an outlier; can't compare to US, and so on. List of pro gun literature here.]
Do look through the links. Lots of research here. Please kill this idea.
My bank was taken over… again.
FinansNetbanken (my bank), which is part of Sparekassen Lolland, was bought by Jyske Bank. Here’s Reuters:
(Reuters) – Denmark’s second biggest bank Jyske Bank (JYSK.CO) has agreed to take over Sparekassen Lolland after the unlisted rival failed to meet the financial watchdog’s solvency requirements, the banks said on Friday.
Denmark has the most fragmented banking industry in the Nordic region with more than 100 banks and many in the industry are predicting further consolidation in the wake of the financial crisis.
The two banks said on Friday that the country’s financial services regulator had concluded after an inspection that Sparekassen Lolland needed to make further loan impairment charges and provisions for guarantees.
As a result Sparekassen Lolland said it would be impossible to meet its solvency requirements within the time allowed.
“Consequently, it is not possible for Sparekassen Lolland to continue as an independent financial institution,” Jyske Bank said.
The FSA had set a deadline for the bank of Sunday, Jan 27 at 0500 GMT to meet the minimum capital solvency requirement of 8 percent of assets.
Jyske Bank will take over all of Sparekassen Lolland’s customers, assets and liabilities, except for share capital and subordinated capital, it said in the statement.
The take-over comprises all 45,000 customers of Sparekassen Lolland’s branches and 70,000 customers of online bank FinansNetbanken.
The bank’s balance sheet amounts to 12.9 billion Danish crowns ($2.33 billion) while loans and advances total 7.1 billion crowns and deposits 9.7 billion crowns.
All necessary approvals from the authorities had been obtained, the banks said, offering no details of a takeover price.
Sparekassen Lolland’s branches and FinansNetbanken will be open for business as usual, it said in the statement. ($1 = 5.5380 Danish crowns)
My bank is FinansNetbanken. Before that it was Sparekassen Lolland. Before that it was ‘Finansiel Stabilitet’ (the gov’t's company for bankrupt banks). Before that it was Eik Bank. Before that Skandia banken. That was in 2007. Except Skandia-Eik, none have been ‘voluntary’. I haven’t been hurt, though — given I have deposits well under what’s insured. Still.
If we draw a straight line, I should get a new bank again in a year or so.
(Hopefully not though, Jyske Bank is considerably larger and, I suspect, would create severe havoc should it go under).
Effective from 25 January 2013, Danmarks Nationalbank’s interest rate on certificates of deposit and the lending rate are increased by 0.10 percentage point. The discount rate and the current account rate are unchanged.
The interest rate increase follows Danmarks Nationalbank’s sale of foreign exchange in the market.
Effective from the above date, Danmarks Nationalbank’s interest rates are:
Lending rate: 0.30 per cent
Certificates of deposit: -0.10 per cent
Current account: 0.0 per cent
Discount rate: 0.0 per cent
Good news for banks. Danske Bank’s stock up 1.82 % at pixel:
Denmark was always a safe haven, but one with nice safeness as there was limited downside (unless the peg was broken) making it very interesting if one wanted to bet against the eurozone. Switzerland was another.
Now, with the EUR/CHF is moving higher, one might ask if the Danish central bank (“Nationalbanken”) is considering raising the deposit rate to zero or its lending rate further. It’s currently -0.20 for the deposit rate and 0.20 for the lending rate. For background see this post from when Nationalbanken introduced the negative deposit rates.
The EUR/DKK has recently traded in the upper bound of the range:
This gives them room to move. If one looks at the ‘Foreign Exchange and Liquidity and Monthly Balance Sheet, December 2012‘ one can see that:
In December 2012 the foreign-exchange reserve decreased by kr. 8.0 billion to kr. 504.0 billion. The decrease reflects Danmarks Nationalbank’s net sale of foreign exchange for kr. 5.4 billion, and the central government’s net repayment of foreign debt for kr. 2.7 billion, cf. table 1. No value adjustment has been made. In December, Danmarks Nationalbank’s net sale of foreign exchange due to intervention in the foreign-exchange market amounted to kr. 2.6 billion.
Not huge numbers (Nationalbanken’s balance sheet for reference, page 3).
Here’s Nordea with a bit more background:
The combination of rising risk appetite in financial markets and a sidelined ECB has put the Danish central bank in a dilemma. Over the past four months the central bank has been buying Danish kroner to keep the DKK stable versus the EUR. During this perod the bank has spent a total of DKK 5.2bn of its currency reserves to defend the krone.
But even so the DKK has continued to weaken against the EUR, and over the past few days the EUR/DKK rate has risen beyond 7.462. This means that the DKK is trading at levels above the central parity at 7.46038, which has been the level around which the Danish central bank has previously carried out unilateral rate hikes, see chart.
We had initially expected the Danish central bank to counter the significant krone depreciation by hiking rates. We think the main reason why the central bank has not hiked its policy rates is fears of embarking on a zigzag course. This could happen if the bank after an independent rate hike was forced to make an opposite move to match a possible rate cut by the ECB. Also, it cannot be ruled out that the central bank will choose to continue to drain its exceptionally large currency reserves partly to buy time and partly to embark on a slow normalisation of monetary policy
Despite the many uncertainties we stick to our forecast of an independent Danish rate hike in Q1, initially raising the lending and CD rates by 10 bp each.
However, I think Nordea leave out a few things:
1) They focus on the lending rate, whereas I believe the exodus of money is in large part driven by the negative deposit rate. I think that Nationalbanken would like to move by raising the deposit rate independently of the ECB rather than increasing its lending rate. Given unemployment, a deposit rate hike makes more sense and I’d take it to 0.00, not just 10 bps up.
2) We have no idea what the new Governor (Lars Rohde), who starts in the job on February 1, thinks. At all. It’s unlikely that Nils Bernstein will do anything now, thus not leaving room for Lars Rohde to change things.
Nationalbanken certainly has room to move, and lots of banks would — I presume — like to see the negative deposit rate go. Others too. It never made much sense unless as a “take-your-money-elsewhere” anyway, and with that problem out of the way, they should feel free to raise it.
A friend of mine told me a story about how Denmark was part of some early financial innovation in the beginning of the 1990s. I guess it’s old news, but it’s a cool story.
Here’s the LA Times:
The story, for individual investors, began in January when Denmark, with the encouragement and assistance of Wall Street’s Goldman, Sachs & Co., issued 10.3 million “put warrants,” pegged to the level of Japan’s Nikkei stock average, for trading on the American Stock Exchange. Denmark is obligated to pay warrant holders, who can choose to exercise the warrants anytime over the next three years, cash if the Nikkei closes below 37,516.77, its level when the bulk of the warrants were issued Jan. 12 at $4.05 each.
Since then, the Nikkei has plunged and the warrants have become a dream come true for people who bought early.
With the Nikkei index was down to the 28,000.00 range on the Tokyo Stock Exchange, the Denmark warrants that haven’t yet been exercised are trading for about $12 on the Amex.
Denmark wasn’t looking to place a bet that the Nikkei would rise when it issued the warrants. It merely set out to make a bit of pocket change–something less than $2 million–to offset the cost of a recent Eurobond issue.
Nearly all of the $45 million Denmark received for issuing the warrants was spent to buy slightly less-expensive put warrants traded among institutions offshore. Those put warrants are intended to make up for the money Denmark stands to pay out.
Graphically it looks like this:
And a summary in words:
Interesting to sell your rating and ability to get clearing from the SEC. Although, I’m kinda wondering if this is not a little bit more risky that just pocketing a spread [full faith and credit and all given counterparty risk and so on], but what do I know.
Berlingske, which is a Danish newspaper, has a gotcha-story [read: not really] about how Danish municipalities have engaged in speculation and thrown tax-payer monies away on derivatives for nothing.
The story is in Danish only, so here’s a quick summary (feel free to google translate):
So I have some questions, without which I find it hard to understand this story: 1) When were these derivatives contracts entered into, and 2) what kind were they?
The articles mentions exotic interest rate swaps and then explains a plain vanilla floating-for-fixed swaps.
From what I can deduct, this is a story that is very much like the City of Oakland, which Matt Levine wrote about in August.
The story is basically that the municipalities borrowed money at a floating rate and swapped those into fixed payments. There are compelling reasons to do this and not just borrow at a fixed rate, as this can be more expensive.
I went looking at Furesø County, the only county mentioned in the story, to see if I could find something. Unfortunately, they only had stuff from early-2011. What they did have, however, was quite interesting. Here’s their outstanding debt and swaps (I translated it):
Apart from being very opaque, one can certainly see why they lost money on their swaps as interest rates fell. The county’s 2010 budget also has reference to a swaption on the knock-out swap (with Danske Bank deciding). It’s also mysterious to me what that Yen CCY swap is precisely used for.
So what we have here is a county, which has borrowed money at floating rates (Cibor, Euribor, etc.), and then bought swaps to limit their interest rate risk. If we only look at the plain-vanilla kinda swaps, then that’s not really bad risk management. In fact, it’s quite prudent unless you were 100 % sure that rates would fall.
However, we do have mark-to-market losses on the swaps, and that’s great for news stories!
The county is thus paying a low rate on the loan and losing money on the swap, instead of just paying a higher interest rate (as they would have if they just borrowed at a fixed rate). If the swaps are fair, then I have a hard time seeing how that’s so horrible.
I think Matt Levine puts it rather well:
Anyway. I’m not sure what the moral here is. Probably: don’t enter into fixed-rate debt if rates will go down. Another possibility is: if you have the choice between doing something very plain-vanilla and at observable market rates, or doing something more customized that pays you $15mm up front, the one that pays you $15mm up front is always a worse idea.
But then again, if we could see all those swaps, we might be able to actually analyze whether they actually did anything wrong by speculating, or whether they are just paying for rates going down. It’d be nice of Berlingske, the minister, the governor, and those professors to explain what exactly it is that we are supposed to be outraged about* instead of just using vague words.
*Now, if some municipalities actually engaged in speculation, or used exotic derivatives which they didn’t understand, that is wrong — but then they should say so! And the article should say so too!