COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Denmark 2014
Date: 2014-03-05
Institutions: European Commission
Subjects: Denmark, Euro Group (euro area), competitiveness, economic growth, indebtedness, macroeconomics, real estate credit, stability pact













EUR-Lex - 52014SC0077 - EN











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52014SC0077

COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Denmark 2014 /* SWD/2014/077 final */









Results of in-depth reviews under
Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic
imbalances
The macroeconomic challenges in Denmark
no longer constitute substantial macroeconomic risks and are no longer
identified as imbalances in the sense of the MIP. The adjustment on the
housing market and the implications of a high private sector debt for the real
economy and the stability of the financial sector seem contained.
 However, these developments, as well as drivers of external
competitiveness deserve continued monitoring.  
More specifically,
macro-financial risks stemming from elevated private debt appear limited, even
in the face of tail risks such as combined adverse interest rate shocks and
unfavourable labour market developments. The high level of household debt is
matched by high household assets, mirroring large savings in pension funds and
real estate. Households have so far been financially capable of handling the
house price adjustment since 2007, as the number of arrears has stayed at a
very low level. Moreover, various stress test and studies have concluded that
the households would be resilient in the event of adverse shocks. The financial
sector appears stable with the remaining challenges tackled through
strengthened regulatory and supervisory measures. Regarding competitiveness,
Denmark has been losing export market shares; this is linked to high wage
growth and weak productivity growth. However, the mismatch between productivity
and wages seems to be a cyclical phenomenon.  In view of the high current
account surpluses, the trend decline in exports market shares does not point to
short-term risks. As regards public finances, Denmark is expected to have
sustainably corrected its excessive deficit in 2013.
Excerpt of country-specific findings on Denmark, COM(2014) 150 final,
5.3.2014
Executive Summary and Conclusions 5
1.       Introduction  7
2.       Macroeconomic
Developments 9
3.       Imbalances
and Risks 13
3.1.     Competitiveness
and exports performance  13
3.2.     Household
sector indebtedness 16
3.2.1.  Household debt
developments 16
3.2.2.  Tax incentives 17
3.2.3.  House price
dynamics in Denmark  18
3.2.4.  Mortgage debt
and risks to financial stability  19
3.3.     Financial
sector 21
3.4.     Risks to
economic stability  23
4.       Policy
Challenges 27
References 30
LIST OF Tables
2.1.     Key
economic, financial and social indicators - Denmark  11
LIST OF Graphs
2.1.     GDP growth,
Denmark vs. Euro Area   9
2.2.     Flows in
the Danish labour market, per cent of labour force, 2012  9
2.3.     Composition
of the current account 10
3.1.     Decomposition
of Rate of Change of ULC vs. Euro Area   13
3.2.     Wages and
productivity in the private sector 13
3.3.     Loss of EMS
(5 year cumulative change) 13
3.4.     Export
market share decomposition  14
3.5.     Geographical
and sectoral composition of change of export shares 14
3.6.     Dynamism
and competitiveness of top-10 country exports destinations (2010-2012) 15
3.7.     Growth in
Danish EMS from 1995-2012 (manufacturing, volumes) 15
3.8.     Household
debt 16
3.9.     Correlation
between households' pension assets and gross debt across countries, 2012  17
3.10.   Evolution of
house price index and MFI loans for house purchase  18
3.11.   Price to rent
and price to income  18
3.12.   Relative
house price gap   19
3.13.   Breakdown of
debt vs. financial margin, families with mortgage debt, tight budget, 2010  19
3.14.   Number of
families with expiring deferred amortisation loans 20
3.15.   Arrears,
enforced sales and mortgage banks' total loan impairment charges 21
3.16.   Funding
structure  22
3.17.   Development
of household debt over a business cycle, (t=1986 and 2007) 24
3.18.   Credit supply
and demand deleveraging pressures 24
LIST OF Boxes
3.1.     The Danish
mortgage system   25
3.2.     The Bank
Rescue Packages 26
LIST OF Maps
No table of contents
entries found.
In April 2013, the Commission concluded
that Denmark was experiencing macroeconomic imbalances, in particular as
regards developments related to household debt, the housing market and, to some
extent, external competitiveness. In the Alert Mechanism Report (AMR) published
on 13 November 2013, the Commission found it useful, also taking into
account the identification of an imbalance in April, to examine further the
persistence of imbalances or their unwinding. To this end this In-Depth Review
(IDR) provides an economic analysis of the Danish economy in line with the
scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP).
The main observations and findings from this analysis are:
·       In order to safeguard the high relative welfare level in Denmark,
boosting productivity growth is a key economic challenge. The analysis in section 3 indicates that the loss of export market
shares can be linked to the deterioration of cost competitiveness in the decade
leading up to the economic crisis, namely due to excessive wage growth during
the overheating of the economy in 2006-2007. Wage growth has moderated
considerably in recent years, gradually alleviating the competitiveness
problem. However, the weak productivity growth over the last two decades
remains a concern.
·       Risks stemming from high household indebtedness seem contained and
the mortgage system seems solid. Private sector
debt, in particular that of households, is a structural feature of the Danish
economy. It is related to the country's mortgage system, which ensures low
risks for clients and banks when financing mortgage loans, through a precise
match between the mortgage loan raised by a homeowner and the bonds issued by
the mortgage bank for funding the particular loan. The Danish housing market
seems to be recovering from the crisis and households have been financially
capable of handling the house price adjustment from 2007 to 2012. When the
housing bubble burst, households’ net wealth dropped. However, their net asset
position has been comfortable, mirroring large assets in pension funds and real
estate, and the increase of mortgage arrears has been marginal. With assets
largely exceeding liabilities, the net asset position of Danish households
remains at levels comparable to those of other EU countries. In the tail risk
event of simultaneous materialisation of low economic growth, rising
unemployment, rising interest rates and falling house prices, the stability of
Denmark's financial sector could be at stake. On the other hand, the condition
of the Danish mortgage sector seems solid, and the introduction of stricter
requirements for deferred-amortisation and variable-interest loans have reduced
future risks. In addition, the deleveraging process in the Danish household
sector is taking place in an orderly manner. Nevertheless, reducing the
households' gross debt level is a slow process, which is expected to continue
for a number of years.
·       The financial sector in Denmark remains stable. There are some
challenges, but they are being tackled through strengthened regulatory and
supervisory measures taken by the Danish authorities. Notably, tools for enhanced monitoring of individual banks have
been introduced, such as the ‘Supervisory Diamond’, the creation of a bank
resolution regime (based on the Financial Stability Company), and the
establishment of new institutions responsible for macro-prudential oversight.
The IDR also discusses the policy
challenges stemming from these imbalances and what could be possible avenues
for the way forward. A number of elements can be considered:
·       Concerning the challenge linked to improving external
competitiveness, different aspects can be discussed. The most important challenge remains the necessity to boost productivity
growth. The Danish government has taken measures in this regard, including the
establishment of a so-called ‘Productivity Commission’, who has a two-year
assignment of analysing the productivity development in the Danish economy and
giving recommendations on improving productivity growth. It has already
released a number of studies since its establishment at the beginning of 2012
and is expected to deliver its final report, with recommendations, in the
course of the first quarter of 2014. According to the commission's preliminary
findings, weak productivity growth is to a large part due to slow productivity
growth in the private services sector. This development is partly explained by
inadequate competition due to excessive regulation and a lack of internationalisation.
The work by the ‘Productivity Commission’ is expected to be followed-up by the
Danish authorities this spring, with new measures aimed at enhancing
productivity growth. This work is highly encouraged, as it is crucial in order
to secure the relative high welfare level of Denmark in the future.
·       Concerning the challenge linked to high household debt and the
implications for the real economy, a number of measures can be considered. In order to ensure the stability of the housing sector it is
crucial to focus on avoiding pro-cyclical taxation, securing the stability of
the mortgage market, reducing debt bias in taxation and ensuring a sound
sustainability-oriented fiscal policy. The key to improving the stability and
robustness of the mortgage market is to reduce the incentives for households to
take up debt, in particular to take loans that are linked to higher risk. This
is already taking place, and measures adopted by the Danish authorities and the
mortgage credit institutions (MCIs) go in the right direction. A next step
could be to introduce regulatory rules for the MCIs on stricter and more
sector-specific supervision (a new ‘Supervisory Diamond’), and on the maturity
extension of short-term covered bonds used to finance the mortgage loans. 
·       Concerning the challenge related to the stability of the financial
system in the medium term, the Danish financial sector has been strengthened
and rules have been tightened. This is a direct
consequence of the measures taken by the Danish authorities to identify,
monitor and limit the risks to financial stability. More attention is now paid
to systemic financial risk, and the authorities have defined stricter
requirements for SIFIs. The liquidity of the banks has been further fortified
through Bank Rescue Packages 4 and 5. However, a few non-systemic banks still
need to adjust their balance sheets and reduce their customer funding gaps in
order to comply with the upcoming liquidity regulations. Continuous monitoring
of the internal-rating-based (IRB) models used by the systemically important
banks, leverage ratio and maintenance of effective financial supervision
(‘Supervisory Diamond’), may further reduce the vulnerabilities of the
financial sector.
On 13 November 2013, the European
Commission presented its second Alert Mechanism Report (AMR), prepared in
accordance with Article 3 of Regulation (EU) No. 1176/2011 on the prevention
and correction of macroeconomic imbalances. The AMR serves as an initial
screening device helping to identify Member States that warrant further
in-depth analysis to determine whether imbalances exist or risk emerging.
According to Article 5 of Regulation No. 1176/2011, these country-specific
‘in-depth reviews’ (IDR) should examine the nature, origin and severity of
macroeconomic developments in the Member State concerned, which constitute, or
could lead to, imbalances. On the basis of this analysis, the Commission will
establish whether it considers that an imbalance exists in the sense of the legislation
and what type of follow-up it will recommend to the Council.
This is the third IDR for Denmark. The
previous IDR was published on 10 April 2013 on the basis of which the
Commission concluded that Denmark was experiencing macroeconomic imbalances
involving the high level of household debt and the continuing adjustment in the
housing market. Overall, in the AMR the Commission found it useful, also taking
into account the identification of imbalances in April 2013, to examine further
the persistence of imbalances or their unwinding. To this end this IDR takes a
broad view of the Danish economy in line with the scope of the surveillance
under the Macroeconomic Imbalance Procedure (MIP).
Against this background, this IDR is
organised as follows: Section 2 presents an overview of the general
macroeconomic developments that have contributed to the build-up of imbalances
in Denmark. Section 3 looks more in detail into these imbalances and risks.
Section 4 discusses policy options to overcome them.
The financial and economic crisis in
2008-2009 put to an end a period of almost continuous growth between 1995 and
2007. In 2006-2007 the Danish economy showed clear
signs of overheating, caused by accelerating construction, investment and
private consumption on the back of a high credit growth and a steep increase in
house prices. A correction of the housing market started in 2007 and triggered
a slow-down of the economy already before the outbreak of the financial and
economic crisis. In general, the Danish business cycle has been parallel with
the euro area cycle, however, GDP-growth has been lower than in the euro area
most years since 2000 (Graph 2.1).
The recovery of the Danish economy after
the economic downturn has been anaemic. In the
third quarter of 2013, GDP was broadly at the same level as in the third
quarter of 2010 and still 5% below the pre-crisis peak from the second quarter
of 2008. In 2013, GDP is estimated to have grown by a meagre 0.3%, but GDP
growth has picked up in the course of the year. Economic growth is expected to
gain traction in 2014 and 2015, with real GDP growing by 1.7% and 1.8%,
respectively. ([1])
The Danish economy has benefitted from
‘safe-haven’ capital inflows. During the sovereign
debt crisis in Europe international investors have sought refuge in
highly-rated mortgage bonds and government securities from Denmark. This has
resulted in very low interest rates and supported private demand and the Danish
housing market. However, the ongoing deleveraging process in the household and
corporate sectors following the significant asset losses in the beginning of
the crisis and relatively weak export performance have held back the recovery
of the Danish economy.
The labour market has been relatively
resilient despite the weak economic recovery since 2009. Part of the explanation for this might be that the slow recovery
to some extent reflects a weak performance in sectors with high value added but
with relatively low employment intensity, such as North Sea oil extraction and
the financial sector. Looking beyond these two sectors, the recovery in the
remaining part of the private sector – which stands for 95% of private
employment – has been much more pronounced.([2]) 
The Danish labour market is flexible,
also with respect to wage formation. Wages, which
in Denmark are negotiated between the social partners, responded quickly to the
outbreak of the economic crisis. The reduction in wage growth contributed to a
relatively limited increase in unemployment and has supported competitiveness.
The Danish labour market has been dynamic, even during the height of the
crisis. Job churning is very high with close to 20% of employed changing job
every year.([3]) There are
correspondingly high in- and outflows of unemployment (Graph 2.2) and thus a relative low level of
long-term unemployment (1.7% of the active population in the third quarter of
2013), which limits the social consequences of the crisis and the risk of
hysteresis. In the third quarter of 2013, the employment rate stood at 73%,
which is the fifth highest level in the EU.([4])
The current account balance has been
positive for more than two decades. The Danish
economy is currently characterised by a peculiar combination of high export
market losses, weak competitiveness and high current account surpluses.
Compared to the situation in 2005, the current account surplus has increased
from 4.3% to close to 7% of GDP in 2013.([5]) While the trade balance is broadly at the same level in the two
years, the increased current account surplus reflects a higher surplus on the
income balance (Graph 2.3). 
The high current account surplus is thus
not a sign of competitive strength, but rather
sluggish domestic demand, high savings in the corporate sector and higher
yields on investments abroad than in Denmark. At the same time, the net
international investment position (NIIP) has been positive since 2009 and
reached 38% of GDP in 2012.
Business investment has been weak since
the outbreak of the financial crisis and savings in the corporate sector are
historically high. Despite government initiatives,
namely the ‘investment window’ tax incentives, which ended at the turn of the
year, investment activity has been low and the savings rate in non-financial
companies has been above 10% since 2010 (the average savings rate in 1990 to
2009 was 2.6%). The corporate savings rate is expected to stay at a high level
in coming years. On the one hand investments are supported by the general improvement
of the outlook as the recovery gains traction, as well as the effects of
bulk-up demand from a long period of low investments. On the other hand, the
capacity utilisation is still below the historical average (at 80.5% in the
industry sector in the first quarter of 2014) reducing the need for new
investments.
House prices in Denmark seem to have
bottomed out, after the correction from 2007 to 2012. The developments in the housing market do not point to
instabilities. The current house price level seems to be in line with long-term
trends and the risk of further adjustments of house prices appears to be
limited. While the household debt level is high, the net asset position of the
sector remains comfortable, with assets largely exceeding liabilities.
Credit standards have been tight, but
stable in 2013. According to the latest bank
lending survey from Danish National Bank([6]), the credit policy in banks and mortgage institutions was broadly
stable in 2013 both towards business and private customers. The stabilisation
follows a tightening of credit standards during the height of the financial
crisis in 2008-2009 and again during the sovereign debt crisis in 2011-2012.
In April 2013, the European Commission
concluded that Denmark was experiencing macroeconomic imbalances, especially
regarding external competitiveness and the household debt coupled with
vulnerabilities in the housing market. In the Alert Mechanism Report (AMR)
published in November 2013, the Commission assessed that those imbalances are
implying potential risks for macroeconomic stability. For this reason, this
chapter focuses on monitoring and assessing the persistence of imbalances. 
3.1.      Competitiveness
and exports performance
Since the mid-1990s, growth in unit
labour cost (ULC) has almost continuously exceeded that of the euro area (Graph 3.1). This reflects both slow productivity
growth and relatively high wage growth. The development was compounded by the
overheating of the economy in the years preceding the financial crisis. In this
period, tight labour market conditions led to high wage growth while
productivity growth was weak and even negative in some years, leading to very
high increase in ULC.
In the aftermath of the crisis,
productivity growth has improved and wage growth has moderated. This has enabled Denmark to recover some of the loss of
competitiveness since the mid-1990s, reducing the mismatch between wage and
productivity developments that arose during the overheating of the economy
(Graph 3.2). The annual growth in nominal unit
labour costs (ULC) has slowed from close to 6% both in 2008 and 2009, to 1.6%
in 2012. 
As most other industrialised economies,
Denmark has been losing export market shares (EMS).
This synchronised pattern across industrialised countries seems to be related
to the integration of emerging markets into the global economy.([7]) Since the turn of the century, Denmark's loss of export market
shares has broadly followed the average development of other EU15 countries([8]), (Graph 3.3) Since 2010, the five year cumulated
losses have been slightly bigger in Denmark, than the EU15-average.
Denmark's loss in export market shares
seems to be linked to unfavourable cost competitiveness trends. As pointed out in the previous two IDRs, Denmark's weak performance
in exports of goods during the last decade appears to be linked to the rise in
ULC. The loss of EMS is larger in volumes than in values, reflecting the
continuous terms-of-trade improvement over the last years. The loss of EMS
appears to be related to the development within goods exports, while service
exports, which to a large extent consist of shipping, have performed better
(Graph 3.4).
Exclusively focusing on relative ULC
trends would overstate Denmark's competitiveness problem. Denmark has experienced a continuously positive terms-of-trade
development since the start of this century. According to a recent survey from
the Danish Ministry of Finance, this development reflects the specific
specialisation pattern of Danish companies which seem to have specialised in
areas with below average global productivity growth, and where unit labour
costs and prices therefore are growing faster than the average of other
countries' exports.([9]) The study
seeks to identify whether the profitability in the Danish manufacturing sector
is squeezed by higher unit labour costs compared with competitors abroad or if
higher unit labour costs reflect a specialisation in branches with low
productivity growth and high cost growth. By correcting for the beneficial
terms-of-trade developments experienced by Danish manufactures and measuring
the relative wage share, the study confirms that competitiveness has
deteriorated, but to a smaller extent than if measured by relative ULC.
Export market share losses have
increased in 2010-13 despite more favourable ULC developments. This might indicate that other factors are at play. However, a
shift-share analysis([10]) confirms
that the loss of market shares since 2006 is predominantly due to weak export
performance rather than initial specialisation (Graph 3.5). However, since 2008, losses due to
unfavourable initial geographical orientation have also played a role, while product
composition has had a broadly neutral effect.([11]) The loss of market shares due to initial geographical
specialisation may reflect the Danish orientation towards the European market
(Graph 3.6). In value terms, close to 60% of Danish
goods export, and 45% of service exports are directed towards other EU
countries. Therefore, Denmark could benefit from a greater representation in
high-growth emerging markets.
In 1995-2012, Denmark lost export market
shares in manufacturing exports in four out of its five top export markets (Germany, Sweden, Norway and in the UK), while it managed to
increase its market shares in USA (Graph 3.7). The improved performance in the USA is
mainly due to strong growth in exports of chemicals (including pharmaceuticals)
and machines and transportation. Generally, Denmark has increased its
manufacturing market shares the most in markets that traditionally have been
less important destinations for Danish exports, like Canada and Mexico ([12]). 
Denmark's deteriorating performance in
its export markets warrants a further adjustment in unit labour costs. While wages are set in negotiations between social partners, there
seems to be scope to introduce new measures to increase productivity growth.
As in many other European countries, productivity growth in Denmark slowed down
in the mid-1990s. And the slowdown in Denmark has been even more pronounced
than in countries such as the Netherlands, Sweden and Germany. According to the
OECD([13]), labour
productivity grew by an average of 0.94% in Denmark over the period 1995-2011,
while the corresponding number was 1.98% in Sweden and 1.23% in the
Netherlands. While especially Sweden has had a large contribution to labour
productivity growth from total factor productivity growth, this component has
had a negative impact in Denmark.
Productivity growth has been especially
weak in those parts of the private services sector that are oriented towards
the domestic market and hence not exposed to foreign competition. According to the Productivity Commission([14]), this weak development in the domestically oriented private
services sector may be due to factors such as relatively weak business
dynamics([15]) and lack of
competition, for example due to excessive red tape and inadequate
internationalisation. Weak competition in the domestically oriented private
services sector may have negative effects on the competitiveness of the export
oriented sectors, as weak competition will lead to higher prices on domestic
services used as input in the production.
3.2.      Household
sector indebtedness
3.2.1.   Household
debt developments
Private sector debt – in particular that
of households – remains a structural feature of the Danish economy. The 2013 IDR has identified some vulnerability associated with this
feature; however the conclusion was that the risks are contained. Private
sector gross debt as a share of GDP peaked in 2009 and has declined somewhat
thereafter. In particular, household sector gross debt remains high at above
140% of GDP in consolidated terms or around 320% of disposable income([16]). However, since 2009 a gradual consolidation has taken place, with
household debt decreasing from 146.5% of GDP in 2009 to 140.4% in 2012 (Graph 3.8).
The high household gross debt level in
Denmark should be viewed in light of country-specific circumstances. A special feature of the Danish economy is the country's mortgage
credit system (Box 3.1), which has proven resilient in the
past. The mortgage system is based on the balance principle, which ensures a
match between the mortgage loan raised by a homeowner and the bonds issued by
the mortgage bank for funding the particular loan. Therefore, the financial
risk borne by mortgage banks is kept at a minimum. During the recent financial
crisis, interest rates on covered bonds have been decreasing, as the covered
bond market has benefitted from ‘safe haven’ capital inflows. In the latest
refinancing auctions in November 2013, the interest rates reached a
historically low level.
The success of the Danish covered
mortgage bonds has led to cheap financing and high demand for this type of
mortgages. This has increased the possibility for
Danish consumers to smoothen consumption over their lifespan. The portfolio of
mortgage loan types was widened in 1996 with the introduction of
adjustable-interest rate mortgage loans and again in 2003 with the introduction
of deferred-amortisation loans. Cheap financing, as the interest expenditures
of Danish households have continuously decreased in the period 1995-2013, is
likely to have contributed to an increase in the gross household debt level as
households have been capable of taking on more debt. Deferred amortisation
loans may also have led to a structural increase in the debt-to-value ratio of
housing assets, as it has made it easier for households to choose not to save
in housing assets.([17])
The introduction of new mortgage loan
types seems to have contributed to the overheating of the housing market. According to the ‘Committee on the causes of the financial crisis
in Denmark’,([18]) the house
price bubble in Denmark was driven by a combination of a cyclical upswing, low
interest rates, low unemployment, too optimistic expectations regarding future
developments in the housing market, the introduction of new loan types
(deferred amortisation and adjustable-interest rate mortgage loans) and the
nominal freeze on property value taxes. The availability of cheap financing
thus seems to have been one of several factors contributing to the
unsustainable high growth in house prices up to 2006. 
High household debt has to be set
against the sector's favourable asset position.
Apart from high assets in housing, Denmark has a well-developed pension system
with both public and private savings-based pensions. The private savings-based
pensions are rooted in labour market agreements. They have been built up since
the 1990s and now include a large majority of employees in Denmark. The system
secures high income compensation after retirement and reduces thus the
households’ need to pay down their mortgage as a way of saving. A cross-country
comparison suggests a correlation between household debt and pension assets,
where especially the Netherlands and Denmark stand out as countries with highly
developed pension systems coupled with high household gross debt (Graph 3.9). 
With assets largely exceeding liabilities,
the net asset position of Danish households remains positive at levels
comparable to other EU countries. However, low
liquidity of the private pension savings, which represent a large part of the
assets, makes Danish households' balance sheets more vulnerable to shocks
affecting households' debt servicing capacity. Against this background, and as
already mentioned in the 2013 IDR, avoiding pro-cyclical taxation, securing the
stability of the mortgage market, reducing the debt bias in taxation and, more
generally, a sound sustainability-oriented fiscal policy is of particular
importance. 
3.2.2.   Tax
incentives
The high level of household debt is
partly connected to the structure of the tax system. Pension schemes seem to have become an important savings vehicle in
Denmark due to the low taxes on pension returns. For young people, or for
people with positive net capital income, there might therefore be a
tax-incentive to increase mortgage debt and to offset this debt with pension
savings.([19])
The property value tax freeze applied in
combination with mortgage interest tax deductibility has arguably contributed
to the housing bubble. The steep increase in
housing prices up to 2007 was not corresponded by increased taxes and according
to a model estimation by the Danish National Bank this contributed to the
inflation of house prices during the boom years.([20]) Land value taxes are, on the other hand, allowed to increase in
line with new valuations, but with a maximum increase of 7% per year. As a
consequence, land value taxes did not fully reflect price increases during the
years of overheating, while they have continued increasing (in order to catch
up with previous price increases) after the bust of the housing bubble. This is
clearly disadvantageous from a cyclical point of view, as property taxes should
ideally contribute to reduce fluctuations in the housing market. Both nominal
tax freeze and capping of assessed property values reduces the counter cyclical
properties of housing taxation both during upswings and downturns. From a
distributional([21]) and a
tax-efficiency point of view, it would be preferable to give priority to a
reduction of more distortionary taxes, while maintaining the relative level of
harder-to-escape indirect or property taxes.
3.2.3.   House
price dynamics in Denmark
The Danish housing market seems to have
recovered from the crisis. House prices increased
continuously between 1997 and 2006, with a rapid acceleration between 2003 and
2006. A prolonged correction of prices started in 2007, interrupted in 2009-10.
Real house prices fell by 4.3% in 2011 and by 5.4% in 2012. Prices for both
houses and apartments now seem to have stabilised and prices have started
increasing in certain segments of the market. This is especially the case for prices
of apartments – three quarters of which are sold in the Copenhagen area – while
price developments have been more sluggish for single-family homes, (Graph 3.10).
House prices appear to be in line with
long-term trends. Comparing current house prices to
longer-term trends indicates that the adjustment of Danish house prices has
come to an end and that the risk for further adjustments is limited. In the
third quarter of 2013, Danish house prices were only slightly overvalued, both
with regards to price-to-rent ratio and price-to-income ratio (Graph 3.11). An analysis of house price cycles,
which compares house prices to their filtered trend, lends support to this
assessment, suggesting that the house price bust ended in 2012 (Graph 3.12).
3.2.4.   Mortgage
debt and risks to financial stability
Elevated household debt levels pose some
macroeconomic risks. A high gross debt, combined
with widespread use of variable interest rate loans, is counter-cyclical in
normal times, but implies a risk in case of negative interest rate shocks. In
addition, households' balance sheets are vulnerable to house price decreases
and the ability to service debt could suffer if the labour market deteriorates.
Due to Denmark's fixed exchange rate regime there is an additional risk of
simultaneous interest rate and unemployment increases.
Denmark's mortgage system is
characterised by a high share of variable-rate and deferred amortisation loans. The share of variable-rate (or "adjustable rate") loans
by mortgage banks remains high at 72% of total lending in November 2013.([22]) The variable rate loans are particularly widespread among families
in the top 10% and the bottom 10% of the income distribution. The share of
deferred-amortisation loans, i.e. loans with interest-only payments in the
initial phase of the contract, is also high, amounting to 53% of total mortgage
lending in November 2013.([23]) 
The high level of household debt and the
extensive use of adjustable rate mortgages have increased the vulnerability of
the financial system. However, the mortgage debt in
Denmark is primarily concentrated amongst higher-income households, with one
third of the total mortgage debt in the hands of the 10% of households with the
highest incomes. Only around 1% of total mortgage debt is owed by the 10% of
households with the lowest incomes. A study commissioned by the Ministry of
Business and Growth concludes that in the event of an interest rate shock of
around 500 basis points only 13% of households would have to spend more than
half of their disposable income to service their debt.([24]) Furthermore, only 9% of households would be unable to amortise
their debt over the loan’s term to maturity (20 years) under the worst case
scenario that households could not change the type of loan or simply sell their
property.([25]) A study by
the Danish National Bank comes to similar conclusions, in particular that
households with the highest debt usually hold the largest amounts of assets
(Graph 3.13). Such households tend to have a broad
‘financial margin’, defined as the amount of money at a household’s disposal
after paying accommodation expenses and other general costs of living.([26]) Hence, according to these two studies([27]), a majority of the households in Denmark is financially robust to
withstand a significant interest rate shock or a prolonged period of
unemployment, by reducing consumption or increasing savings.
In general, deferred-amortisation loans
add to financial sector vulnerability especially in periods with decreasing
house prices. In such a situation a borrower may
not have the option of refinancing with a new deferred-amortisation loan and
will possibly have to amortise parts of the debt within a short period. This
may lead to a steep increase in debt payments. The combination of decreasing
house prices and deferred-amortisation loans is also a challenge for mortgage
banks, as their need to pledge for top-up collateral increases. In an attempt
to mitigate this risk, since May 2013 variable-rate loans and/or
deferred-amortisation loans may only be granted to borrowers who would be able
to service a fixed-rate loan with amortisation.([28]) 
Deferred-amortisation loans were
introduced in Denmark in 2003 and are usually granted with a 10 year
interest-only period. Hence, the number of
households required to repay the principal amount of these types of loans will
start increasing in 2014, and in the coming years the interest-only period will
expire for a significant number of households every year (Graph 3.14). The estimation of the distribution on
loan-to-value (LTV) ratios is based on the assumption that house prices are
unchanged at end-2011 level up to 2021. A large amount of the households have a
loan-to-value (LTV) ratio below 80%  – even in the event of unchanged house
prices in the coming years – and could choose to refinance to a new
deferred-amortisation loan, extending the interest only period by another 10
years.
Borrowers who enter the amortisation
period with a LTV ratio of over 80% will generally have three options. They can convert their loan into a standard 30-year loan with
amortisation, a solution which probably will be promoted given that the
conditions for granting new deferred-amortisation loans have been tightened.
Another option is raising a new deferred-amortisation loan up to the 80% LTV
limit and then finance the remainder with a bank loan. Finally, the mortgage
banks can offer households under particular stress a new deferred amortisation
loan as a loss-preventing measure. With the last option, the mortgage bank must
book a loan impairment charge.
The expiration of the deferred-amortisation
period for mortgage loans is expected to be manageable. According to a study by the Danish National Bank([29]), approximately 240,000 families had in 2011 a combination of
deferred-amortisation loans and a LTV ratio over 80%. Were all these households
to begin amortising their loans, the number of families with a negative
financial margin would increase from 5,800 to 18,800. If the households
converted their loans to new deferred-amortisation mortgage loans within the
80% LTV limit and finance their remaining debt with bank loans, the number
would only increase to 8,300 families, liable for 1.5% of households' total
mortgage debt and 1% of households' total bank debt.
 
 
Mortgage arrears are very low in
Denmark. The number of Danish households falling
behind on their mortgage payments has remained at a low level since the
mid-1990s (in March 2013 the arrears rate stood at 0.3%).([30]) This has been partly due to favourable macroeconomic developments,
such as relatively low unemployment, low interest rates and to the introduction
of deferred-amortisation loans in 2003. Even during the financial crisis in
2007-8 mortgage arrears increased only marginally (Graph 3.15), and according to a study by the
Danish National Bank, a severe interest-rate shock to the Danish economy would
cause only a slight increase in the number of families in mortgage arrears,
because households tend to give priority to mortgage debt over other kinds of
debt in order to avoid enforced sales.([31])
Risks stemming from high household
indebtedness seem contained and the system is generally stable. In the unlikely event of a simultaneous materialisation of risks,
such as low economic growth, rising unemployment, rising interest rates and
falling house prices, the stability of Denmark's financial sector could be at
risk. However, the condition of the Danish mortgage sector seems solid, and
stricter requirements for deferred-amortisation and variable-interest loans
reduce future risks. Meanwhile, the authorities have implemented measures to
improve micro- and macro-prudential supervision that go into the right
direction, but their completeness and effectiveness have yet to be proven.
3.3.      Financial
sector
Denmark’s banking sector is large and
sophisticated, with seven systematically important financial institutions
(SIFIs) and a large number of small banks. The
total assets of Danish banks amount to over four times of the nominal GDP and
the two largest banks (Danske Bank and Nordea) account for some
two thirds of total assets in the sector. The banking system is still
recovering from the economic crisis, which negatively affected its
profitability. However, this was mainly due to losses in activities related to
the commercial property sector, rather than arrears in the household sector.
The authorities have taken a set of measures addressing the various problems
that contributed to the crisis, including the implementation of five support
packages for the financial and corporate sector (Box 3.2).
In 2013, the loan-to-deposit ratio has
marginally decreased, while the capital adequacy of the Danish banks improved. Both the Tier 1 capital ratio (17%) and the leverage ratio (5.6%)
are above the Basel III minimum requirements. In the group of the seven largest
banks, the Core Equity Tier 1 ratio (CET1) ranged from 8.5% for DLR Kredit
to 16.6% for Nykredit and BRFkredit.([32]) However, the high adequacy ratios might in some cases result from
the denominator effect, as the CET1 capital is divided by low risk weighted
assets (RWA) resulting from low risk weights used by banks in their
internal-rating-based models. 
The Danish banking sector is mainly
relying on long term market funding. The banks'
market funding consists mostly of deposits from credit institutions and
long-term debt issuance, overall accounting for approximately 60% of the total
funding([33]) (Graph 3.16). The short-term debt issuance accounts
for a small part of the market funding, around 23%. The small share of deposits
in banks' funding is a structural feature of the country’s banking sector.
Households hold very large savings in pension funds, which again invest part of
their portfolio in debt instruments issued by the banks, including mortgage
covered bonds. In January 2013 the pension funds together with life insurance
and mutual funds accounted for around 37% of the investors in the mortgage
covered bonds.([34]) 
Smaller banks still need to build more
robust capital and liquidity buffers. In some
smaller banks capital buffers were even decreasing due to high loan impairment
charges. Yet any problems arising among the small banks could be solved via
business adjustments or within the current framework for mergers and resolution
without significantly influencing financial stability in Denmark.([35]) Indeed, in the aftermath of the crisis, the number of small and
medium-sized banks went down from 137 in January 2007 to 78 in mid-2013([36]). The activities in a large number of the banks that went down were
concentrated in commercial property.
Return on equity has recovered somewhat
for large systemic banks but it is still negative on average for small banks. In 2012, the systemic banks registered impairment charges of 0.7%
of total household loans and 1.1% of corporate loans, while smaller banks
registered 1.1% and 3.7% impairment charges for households and corporate loans,
respectively. The level of non-performing loans (NPLs) stood at 3.7% in 2011
and increased in 2012 to a level of 6.0%. In the third quarter of 2013 the
NPLSs decreased to 4.8%. ([37]) NPLs are mainly concentrated in agricultural and small business
loans, and in small banks. Combined with low interest income due to low
interest rate environment, the high impairment charges contributed to low
profitability of Danish banks. In 2012, the average return on equity stood at
3.6% (2.9% in 2011) for the six largest banks while it was -10.1% (-8.8% in
2011) for the group of middle-sized banks and slightly below zero for the
smallest institutions. On average, in the third quarter of 2013 the return on
equity stood at 1.3%. ([38])
The Danish framework for financial
supervision has been strengthened over the last years. Notably, tools for enhanced monitoring of individual banks have
been introduced, such as the ‘Supervisory Diamond’ ([39]), the creation of a bank resolution regime (based on the Financial
Stability Company)([40]) and the
establishment of new institutions responsible for macro-prudential oversight([41]) of the financial sector and the economy. 
The new regulatory requirements
stipulated in CRD IV may pose a challenge to the Danish banking sector. Two areas can be mentioned in this respect: risk weighting of
mortgage bonds, and possible limits for mortgage bonds([42]) in the portfolio of liquid assets. Discussions on a uniform
definition of high quality liquid assets will continue at the EU level until
June 2014.
Danish authorities have established
specific bodies to deal with the systemic risk. The
Committee on Systemically Important Financial Institutions (SIFIs) was
established in January 2012 with focus on SIFIs: criteria for defining such
institutions, specific requirements and resolution tools. In this respect a
sixth Bank Rescue Package was designed in October 2013, including stricter
requirements for SIFIs([43]) in
particular, such as extra capital requirements, ranging from 1% to 3%. 
A Systemic Risk Council was established
in February 2013 by the Ministry of Business and Growth. The Council will monitor and identify systemic risk in the
financial sector and it will issue warnings and recommendations on
macro-prudential policies to the FSA and the government (in case of legislation
issues).
The Danish authorities have taken
various measures to identify, monitor and limit the risks to financial
stability. More attention is being paid to the
systemic financial risk and the authorities have defined stricter requirements
for SIFIs. The liquidity of the banks has been further strengthened through the
Bank Rescue Packages 4 and 5. However, few non-systemic banks still need to
adjust their balance sheets and reduce their customer funding gap in order to
comply with the upcoming liquidity regulations. In conclusion, the financial
sector in Denmark remains stable. There are challenges, as discussed above, but
they are tackled through strengthened regulatory and supervisory measures taken
by the Danish authorities over the last years.
3.4.      Risks
to economic stability
The macroeconomic environment in Denmark
is stable and risks to the economic outlook are broadly balanced. Continued improvements in indicators suggest that the recovery will
continue in the coming years. The European Economic Forecast, Winter 2014
foresees an annual GDP growth of 1¾% in 2014 and 2015.
The deleveraging process is proceeding
in an orderly way. As already discussed in previous
IDRs, the deleveraging process is happening in an orderly way and the
households’ balance sheets remain stable, both in terms of size and
composition. Past experience from the late 1980s to the early 1990s show that
deleveraging of household balance sheets is a lengthy process and is expected
to continue in the years to come (Graph 3.17). In addition, Denmark belongs to the
EU Member States with relatively low demand and credit supply delivering
pressures([44]), (Graph 3.18). In addition, the bulk of deleveraging
is being achieved through real growth and inflation, rather than negative net
credit flows which would have been more harmful for economic activity.
In conclusion, the main risks to the
economic stability are related to the situation on the housing market and they
seem contained. The high level of household debt is
matched by high household assets. Households have been so far financially
capable of handling the house price adjustment since 2007. Their net asset
position has been comfortable, mirroring large savings in pension funds and real
estate and the increase of mortgage arrears has been marginal. Macro-financial
risks stemming from high household debt seem contained, even in case of
negative ‘tail events’ such as combined adverse interest rate shocks and labour
market developments.
The imbalances that Denmark is
experiencing with respect to competitiveness and household indebtedness are
gradually unwinding. The imbalances do not
constitute new challenges, and the authorities have already undertaken the
relevant policy responses. As a consequence, the country-specific
recommendations issued for Denmark in June 2013 did not contain a specific
recommendation on the housing market and financial stability. The monitoring
and assessment of progress in the implementation of measures to strengthen the
stability of the housing market and financial system in the medium term is
taking place in the context of the assessment of the National Reform Programme
and Convergence Programme under the European Semester. 
Competitiveness
In order to safeguard the high relative
welfare level in Denmark, boosting the productivity growth is a key economic
challenge. The analysis in section 3.1 indicates
that the loss of export market shares can be linked to the deterioration of
competitiveness in the decade leading up to the economic crisis, namely due to
excessive wage growth during the overheating of the economy in 2006-2007. Wage
growth has moderated considerably in recent years, gradually alleviating the
competitiveness problem. However, the weak productivity growth over the last
two decades remains a concern. It should be recalled that relevant policy
responses in this area were put forward in the country-specific recommendations
(CSRs) issued for Denmark in June 2013, focusing on the removal of obstacles to
competition and enhancing the effectiveness in the provision of public
services. 
As wages are set by the social partners
with little political interference, Danish authorities have rightly focused
their efforts on strengthening business conditions, improving sectoral
regulation and identifying ways to enhance productivity growth. The Danish authorities have set up a number of so-called ‘Growth
Teams’ with the task of identifying growth-enhancing measures in key economic
sectors. Those teams, which were mixed business-government task forces, were
established in eight different business areas where the Danish authorities had
identified special strengths or growth potential, such as the food industry,
health- and welfare solutions, energy and climate, and creative industries and
design.([45]) The last
growth-team delivered their recommendations in late January 2014, with ideas on
how to improve the growth conditions within the ICT (Information and
Communication Technology) and digital growth sector. The recommendations are
followed up by the government with concrete actions. The implementation of
these measures is still at an early stage and the effects are therefore yet to
be seen.
In December 2012, the Competition act
was amended. The reform included a significant
increase in the level of fines and made it possible to impose custodial
penalties on individuals participating in cartels. The new legislation seems to
be in line with the best EU practice in most of the areas. However, there are
still some gaps where the Danish legislation is weaker than in comparable
countries.([46])
The Danish government has taken steps to
increase productivity growth. A ‘Productivity
Commission’, with the two-year assignment of analysing the productivity
developments in the Danish economy and giving recommendations on improving
productivity growth, will soon finalise its work. The Commission has already
released a number of studies since its establishment at the beginning of 2012
and is expected to deliver its final report, with recommendations, in the
course of the first quarter of 2014. According to the Commission's preliminary
findings, weak productivity growth is to a large part due to slow productivity
growth in the private services sector.([47]) This development is partly explained by inadequate competition due
to excessive regulation and a lack of internationalisation. The work by the
Commission is expected to be followed-up by the Danish authorities this spring,
with new measures aimed at enhancing productivity growth. This work is highly
encouraged, as it is crucial to secure the relative welfare level of Denmark in
future.
Household debt
The deleveraging process in the Danish
household sector is taking place in an orderly manner. However – as experienced during previous periods of consolidation –
reducing the household gross debt level is a slow process, which is expected to
continue for a number of years. Meanwhile, the households’ balance sheets have
remained stable, both in terms of size and composition, and the gross debt has
been matched by sizable assets, bringing the net asset position of Danish
households in line with the average in the EU. However, as described in section
3, the large liabilities and the illiquidity of pension assets make the
households more vulnerable in the event of adverse tail risks. Steps have
already been taken in order to reduce the vulnerability towards adverse risks,
but there is a scope for further measures by looking at tax incentives, as well
as by taking measures to increase the solidity of the mortgage sector and the
financial system in general.
Tax incentives
There seem to be important linkages
between the tax system and the build-up of household debt. While the Danish government and the main opposition parties have
agreed in 2012 not to review the nominal freeze of the property value tax
before 2020, the mortgage tax deductibility has been reduced from 73% in 1986
to 33½% today and will, according to current legislation, be further reduced
for households with high interest expenditures to 25½% in 2019. While the land
value tax is adjusted to price developments, there is a cap of 7% limiting the
annual adjustment of land valuations. The cap on the land value tax and the
nominal freeze of the property value tax has effectively decoupled housing
taxes from house price developments, thereby removing counter-cyclical
properties of housing taxes. Re-establishing the link between house price
developments and housing taxes would reduce the future volatility of the
housing market and reduce the risks in the financial system. However, timing is
key for any policy action in this area, in order to avoid adverse effects on
the stability of the housing market.
Mortgage sector
The Danish authorities and the mortgage
credit institutes (MCIs) have taken measures to strengthen the stability of the
mortgage credit system and to limit the incentives to take up debt. The previous 2013 IDR assessed measures taken by the authorities to
limit the use of variable-rate and/or deferred-instalment loans, reduction of
tax deductibility for high mortgage interest rate expenditures, as well as
prudential measures taken by the mortgage industry on its own initiative.
Currently, variable-rate and deferred-instalment loans are only available to
customers who are eligible for a ‘traditional’ loan with a fixed interest rate
and instalments. These measures are considered well targeted in the context of
authorities’ efforts to limit the share of deferred-instalment and
adjustable-rate loans in total mortgage lending. 
Danish authorities seek stable funding
solutions for MCIs. In November 2013, the Danish
government proposed a new law under which short-term mortgage covered bonds
would be subject to an extension by 12 months if a bond refinancing auction
fails or the interest rate that investors demand to refinance the bonds is more
than five percentage points higher than the coupon on similar bonds issued
11-13 months earlier. Yields would then be set to the coupon plus five
percentage points. The proposed new law has been criticised for exposing the
mortgage system to new risks. Notably, if interest rates start increasing, a
self-reinforcing mechanism could be triggered. The increased probability that
the next refinancing auction will result in an interest rate cap, could make
investors start selling bonds in fear of losing money. This may increase the
interest rate up to the value where the cap is actually triggered. 
MCIs are likely to be subject to new and
more sector-specific requirements. In the course of
2014, the Financial Stability Authority (FSA) is expected to design a new
‘Supervisory Diamond’ for MCIs, similar the one already existing for banks,
which will include relevant indicators with thresholds on areas such as the
amount of interest-only loans and the amount of loans with frequent
refinancing. It is crucial that the FSA strikes the right balance when setting
the indicators limits, both for the supervisory tool for the banking sector and
for the future tool for the MCIs. It is also important that the supervisory
tools are monitored with the flexibility of introducing new indicators if
future risks are found in other areas than covered by the original indicators. 
Key to improve the stability and
robustness of the mortgage system is to reduce the policy incentives for
households to take up higher debt. This is
currently taking place, and measures introduced by the Danish authorities and
the mortgage credit institutes go in the right direction. Next step is to
introduce regulatory rules for MCIs on stricter and more sector-specific
supervision and on the maturity extension of short-term covered bonds'. In the
longer term, and with a view to the improvement of stability in the housing
market, a review of housing taxes would be important, in order to strengthen
their countercyclical properties and thereby reduce the future volatility of
the housing market and the corresponding risks for the financial system.
Banking sector
Since 2008, the Danish authorities have
been acting to secure the stability of the banking sector through a series of
financial policy initiatives. The government has
implemented five support packages for the financial and corporate sector.([48]) Since October 2011, the Danish National Bank has offered 6-months
loans to credit institutions in need as additional liquidity assistance. 
Regarding the new requirements for
SIFIs, there might be further scope for improvement linked to the method of
calculating the risk weights. When calculating the
regulatory capital requirements, the large banks are using internal
rating-based (IRB) models in defining assets risk weights. When using these
models there is a risk that the weights will be set too low. The use of IRB
models can be made more transparent if banks are also required to disclose what
the capital requirement would have been by using the standard method approach.
This is in line with the recommendations from the ‘Rangvid Committee’.([49]) This Committee has also recommended
setting up an expert committee to assess whether the leverage ratio stipulated
in Basel III (3%) should be higher for Danish credit institutions.([50])
In March 2012, the Danish Parliament
passed a new amendment regarding an ex ante funding of the Guarantee Fund for
Depositors and Investors. According to the
legislation, banks have to contribute to the Fund by a fixed annual rate of
2.5‰ of net covered deposits. The payments, however, do not reflect the banks'
individual risk (the risk-based payments). 
Better regulation and supervision of the
banking sector is crucial for financial stability after the crisis. Therefore, the Danish financial sector has been strengthened and
the rules have been tightened as a result of measures taken by the Danish
authorities. Continuous monitoring of the IRB models used, leverage ratio and
maintenance of the ‘Supervisory Diamond’, including the forthcoming tool for
MCIs, may further reduce the vulnerabilities of the financial sector.
Beltramello, A., K. De Backer and L.
Moussiegt, “The Export Performance of Countries within Global Value Chains
(GVCs)”, OECD Science, Technology and IndustryWorking Papers, No. 2012/02.
Danish Financial Supervisory Authority,
2010 http://www.dfsa.dk/
Danish Ministry of Business and Growth,
"Kommissorium for ministerudvalg for ny erhvervs- og vækstpolitik",
2012 http://www.evm.dk/
Danish Ministry of Economic Affairs and the
Interior, "Økonomi- og Indenrigsministeriet, Economic Survey",
December 2013. www.oim.dk
Danish Ministry of Finance,
"Finansredegørelse", 2014.
Danish National Bank, "Danmarks
Nationalbank's lending survey, 4th quarter 2013", 2014. www.nationalbanken.dk
Danish National Bank, "Financial
stability", 2013a.
Danish National Bank, "Monetary Review
3rd Quarter", Part 1, 2011.
Danish National Bank, "Quarterly
Monetary Review 1st quarter", Part 1, 2011.
Danish National Bank, "Quarterly
Monetary Review 2nd quarter", Part 1, 2012a.
Danish National Bank, "Quarterly
Monetary Review 3rd quarter", Part 1 and 2, 2013b.
Danish National Bank, "Quarterly
Monetary Review 4th quarter", Part 1, 2012b.
Danish Productivity Commission, "Danmarks
Produktivitet – Hvor er problemerne?", 2013awww.produktivitetskommissionen.dk
Danish Productivity Commission,
"Konkurrence, internationalisering og regulering", 2013b.  www.produktivitetskommissionen.dk
Danske Bank, "Danish Covered Bond
Handbook" 2013
European Commission, "European
Economic Forecast, Autumn 2013", 2013.
European Commission, "European
Economic Forecast, Winter 2014", 2014.
McCluskey, William J. et al, "A primer
on property tax: Administration and policy", Wiley-Blackwell, 2012.
Ministry of Business and Growth,
"Gældsudgifter i husholdninger med realkreditlån", 2013.
OECD, "Economic Outlook vol. 2",
2013
OECD, "OECD Compendium of Productivity
Indicators", 2013.
OECD, "OECD Economic Surveys: Denmark
2013", 2014.
Rangvid J. et al., "The financial
crisis in Denmark – causes, consequences and lessons", 2013.
([1])  European Commission, (2014)
([2])  European Commission, (2013). 
([3])  Danish Ministry of Finance, (2014)
([4])  The employment rate was higher in
Sweden, the Netherlands, Germany and Austria.
([5])  At the time of writing, national
accounts data were only available up to the third quarter of 2013.
([6])  Danish National Bank (2014).
([7])  OECD (2014)
([8])  The member states that has joined since
2004 has been filtered out here, as these countries have been in a process of
catching up. 
([9])  Danish Ministry of Finance (2014).
([10]) The decomposition enables a
differentiation between market share developments linked to the country's
initial geographical or product specialisation, as opposed to real losses in
market shares, i.e. losses due to inferior performance on the specific markets
where the country is already represented.
([11]) See also Beltramello et al. (2012) who
find that the Denmark’s losses of export market shares in 1995-2007 are mainly
due to export performance rather  than geographical or sectoral specialisation.
([12]) Ministry of Economic Affairs and the
Interior (2013) . The study is based on OECD data and does therefore not
include data for BRIC countries. These are, however, included in a "rest
of the world" category, in which Denmark also has been able to increase its
market shares. 
([13]) OECD (2013)
([14]) The Productivity Commission, which was
appointed by the government, is expected to finish its work in the first
quarter of 2014 after spending 2 years analysing the Danish productivity
development and giving recommendations on how to strengthen productivity
growth.
([15]) The term 'business dynamics' describes
to which degree highly productive companies are able to take over sales and
employment at the expense of companies with lower productivity.
Well-functioning business dynamics ensures that employment is moved towards
more productive parts of the economy. 
([16]) The debt level measured as a percentage
of disposable income does not take into account that in Denmark expenditures –
such as education and the health care system – is to a larger extent financed
via taxes compared to many other countries. The difference with other countries
in the gross debt level is therefore smaller when measured against GDP rather
than disposable income.
([17]) Danish Ministry of Finance (2014).
([18]) An independent committee appointed by
the Danish government to analyse causes and consequences of the financial
crisis. See Rangvid et al. (2013).
([19]) Danish Ministry of Finance (2014).
([20]) The National Bank estimates suggest
that the increase in real house prices of 71% from 1999 to 2007 would have been
5 pps. smaller without the property value tax freeze. Excluding also the
introduction of new loan types, the increase in real house prices would only
have amounted to around 15%. See Danish National Bank (2011).
([21]) See for example McCluskey et al. (2012).
([22]) Danish National Bank 
([23]) Danish National Bank
([24]) Ministry of Business and Growth (2013)
([25]) OECD (2013) 
([26]) Danish National Bank (2012b)
([27]) Both studies are based on very detailed
micro-data containing information regarding income, taxes, debt and assets on
(anonymous) individual level for the period 2002-2010 for close to 100% of the
Danish population.
([28]) See Executive Order on good practice
for financial enterprises, investment associations, etc. of 20 December 2012,
which came into force on 1 May 2013.
([29]) Danish National Bank, (2012a)
([30]) Danish National Bank 
([31]) Danish National Bank (2013b)
([32]) Danish National Bank 
([33]) These numbers refer to an aggregate of
lager banks which represents approximately 70% of total industry assets.
([34]) Danske Bank (2013)
([35]) Danish National Bank (2013a)
([36]) OECD (2013) 
([37]) IMF
([38]) IMF
([39]) The FSA, which is responsible for the
supervision of credit institutions, introduced the ‘Supervisory Diamond’ in
June 2010. The supervisory tool came into effect in 2013 and is monitoring
closely banks' performance against five benchmarks regarding large exposures,
lending growth, exposure towards commercial property, funding ratio and
liquidity.
([40]) During the crisis, the Danish
authorities resolved one third of banks out of the total pre-crisis number of
institutions, but their aggregated assets corresponded to only 6% of the sector.
([41]) The Systemic Risk Council and the
interagency committee to develop prudential arrangements for systemically-important
financial institutions (SIFIs)
([42]) In particular, under Basel, covered
bonds are not accepted as level 1 liquid assets.
([43]) At the moment seven credit institutions
are classified as SIFIs: Danske Bank, Nykredit, Nordea Bank Danmark,
Jyske Bank, BRFkredit, Sydbank and DLR Kredit. However,
the final identification is going to be made by the end of June 2014.
([44]) For a detailed presentation of the
indicators included in the credit supply and demand leveraging pressures, see
the 2013 IDR.
([45]) Ministry of Business and Growth (2012)
([46]) Productivity Commission (2013b).
([47]) Productivity Commission (2013a).
([48]) Danish National Bank (2013b)
([49]) Rangvid et al. (2013)
([50]) Ministry of Business and Growth (2013)